Considering Investing in Value Only - Thoughts

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JSPECO9
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Considering Investing in Value Only - Thoughts

Post by JSPECO9 »

Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
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anon_investor
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Re: Considering Investing in Value Only - Thoughts

Post by anon_investor »

JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
You could be wrong and growth keeps going up and value under performs... VTSAX means you have everything.
burritoLover
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Re: Considering Investing in Value Only - Thoughts

Post by burritoLover »

I would add a tilt to value in your portfolio but continue to invest in the total market. For example, I maintain a small cap value tilt of 15%. But this carries more risk. You should not be making changes to your portfolio based on anything the market is currently doing or you perceive it is doing. Whatever you choose, you need to stick with it forever other than maybe reducing risk as you approach retirement. Investors who are changing their portfolio every few years are ones that lose quite a bit of return and don’t even realize it. Those that pick a reasonable strategy and stick with it through thick and thin often do quite well in the long term.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
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JoMoney
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Re: Considering Investing in Value Only - Thoughts

Post by JoMoney »

I don't like active strategies, which "Growth" and "Value" styles are... even Growth/Value "Indexes" involve a lot of turnover.
As someone who owns the S&P 500 index over TSM because I like it's slightly more selective methodology, Tesla's addition to the 500 has kind'a bugged me. If I was going to get even more selective though, while still using mutual/index funds, I would probably move towards a Dividend fund - which is a type of "Value" strategy but with a distinct focus on income. A typical style 'index' of either growth or value is more likely to INCREASE exposure to some of the junkier stocks I would sleep better not owning. A screen that selects stocks expected to continue paying regular dividends weeds out a lot of distressed and junkier stocks that would fall into either style category.
That said though, dividend strategies don't perform any better than a broad market fund, and paying too close attention to the stocks and getting more selective with it is exactly the type of mistake I was trying to keep from making when I got away from having an individual stock portfolio. :annoyed

I would probably have a little trouble sleeping as well if I was missing out on big market gains that I could have easily had by simply "staying the course" with a broad market market fund.
In the decade of 1990 through 1999 Vanguard's Equity-Income fund (which is an older fund that I consider to have very similar characteristics to the VYM Dividend Index fund) only had half the returns/growth of Vanguard's S&P 500 fund
The decade that followed wasn't as good (the 500 lost those gains), but the longer term performance was about the same between them. An investor in either fund would have done just fine but someone who tried to jump back and forth rather than "stay the course" had plenty of opportunities to do worse than either. The most important part of being a passive investor is to be "passive", and avoid making the mistakes of switching strategies, which only opens things up to switching again when something starts to unsettle you (and Mr.Market loves to give you reasons to be unsettled and induce mistakes.)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Topic Author
JSPECO9
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Re: Considering Investing in Value Only - Thoughts

Post by JSPECO9 »

burritoLover wrote: Sat Dec 19, 2020 4:16 pm I would add a tilt to value in your portfolio but continue to invest in the total market. For example, I maintain a small cap value tilt of 15%. But this carries more risk. You should not be making changes to your portfolio based on anything the market is currently doing or you perceive it is doing. Whatever you choose, you need to stick with it forever other than maybe reducing risk as you approach retirement. Investors who are changing their portfolio every few years are ones that lose quite a bit of return and don’t even realize it. Those that pick a reasonable strategy and stick with it through thick and thin often do quite well in the long term.
Thanks burritolover.

I always knew this to be true when you do it as performance chasing. Say: growth stocks go up dramatically over 3-5 years, and you start buying them, then value stocks go up dramatically over 3-5 years, you starting buying those. But if you do the opposite, wouldn't it be a sensible thing to do over a long period of time without never selling? Example: if the strategy is: never buy an asset class when the weighed p/e is over 20 or 25 (whatever you decide in the strategy), and making your purchases based on this regardless of whether the stock price itself goes up or down, would it be an irrational thing to do?

Also, if I may ask, which small cap value fund do you tilt towards?

Thanks for all your help!
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JSPECO9
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Re: Considering Investing in Value Only - Thoughts

Post by JSPECO9 »

JoMoney wrote: Sat Dec 19, 2020 4:40 pm I don't like active strategies, which "Growth" and "Value" styles are... even Growth/Value "Indexes" involve a lot of turnover.
As someone who owns the S&P 500 index over TSM because I like it's slightly more selective methodology, Tesla's addition to the 500 has kind'a bugged me. If I was going to get even more selective though, while still using mutual/index funds, I would probably move towards a Dividend fund - which is a type of "Value" strategy but with a distinct focus on income. A typical style 'index' of either growth or value is more likely to INCREASE exposure to some of the junkier stocks I would sleep better not owning. A screen that selects stocks expected to continue paying regular dividends weeds out a lot of distressed and junkier stocks that would fall into either style category.
That said though, dividend strategies don't perform any better than a broad market fund, and paying too close attention to the stocks and getting more selective with it is exactly the type of mistake I was trying to keep from making when I got away from having an individual stock portfolio. :annoyed

I would probably have a little trouble sleeping as well if I was missing out on big market gains that I could have easily had by simply "staying the course" with a broad market market fund.
In the decade of 1990 through 1999 Vanguard's Equity-Income fund (which is an older fund that I consider to have very similar characteristics to the VYM Dividend Index fund) only had half the returns/growth of Vanguard's S&P 500 fund
The decade that followed wasn't as good (the 500 lost those gains), but the longer term performance was about the same between them. An investor in either fund would have done just fine but someone who tried to jump back and forth rather than "stay the course" had plenty of opportunities to do worse than either. The most important part of being a passive investor is to be "passive", and avoid making the mistakes of switching strategies, which only opens things up to switching again when something starts to unsettle you (and Mr.Market loves to give you reasons to be unsettled and induce mistakes.)
The irony of you saying that about the Tesla addition is that that's exactly the same thing that made me start even thinking about this in the first place.

I notice that in your sig you have a Benjamin Graham quote, and earlier this year I read his book, the Intelligent Investor. Amazing book. I don't remember exactly what chapter it was and don't have the book on me right now, but somewhere in the book Graham states that over a long period of time, buying stocks with a low p/e does better with buying stocks with high p/e (ex: growth stocks). Based on this, do you think that Graham himself would be okay with investing in value index funds only?
burritoLover
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Re: Considering Investing in Value Only - Thoughts

Post by burritoLover »

No, the opposite doesn’t work either - still market timing. If there was a foolproof way to do this that made a difference, then a large number of investors would do the same and it would no longer work. Average PE ratios also changed over long blocks of time and is not something you can use for market timing (and many have tried).

I invest in Vanguard VBR. Others like more small exposure through something like Ishares IJS.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
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Re: Considering Investing in Value Only - Thoughts

Post by tdmp »

Noone knows anything. Just stick with VTSAX. Can't go wrong with it (well unless you panic and sell on downturn....many sold during the march 2020 downturn).
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Re: Considering Investing in Value Only - Thoughts

Post by Register44 »

:arrow:
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JoMoney
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Re: Considering Investing in Value Only - Thoughts

Post by JoMoney »

JSPECO9 wrote: Sat Dec 19, 2020 4:51 pm
JoMoney wrote: Sat Dec 19, 2020 4:40 pm I don't like active strategies, which "Growth" and "Value" styles are... even Growth/Value "Indexes" involve a lot of turnover.
As someone who owns the S&P 500 index over TSM because I like it's slightly more selective methodology, Tesla's addition to the 500 has kind'a bugged me. If I was going to get even more selective though, while still using mutual/index funds, I would probably move towards a Dividend fund - which is a type of "Value" strategy but with a distinct focus on income. A typical style 'index' of either growth or value is more likely to INCREASE exposure to some of the junkier stocks I would sleep better not owning. A screen that selects stocks expected to continue paying regular dividends weeds out a lot of distressed and junkier stocks that would fall into either style category.
That said though, dividend strategies don't perform any better than a broad market fund, and paying too close attention to the stocks and getting more selective with it is exactly the type of mistake I was trying to keep from making when I got away from having an individual stock portfolio. :annoyed

I would probably have a little trouble sleeping as well if I was missing out on big market gains that I could have easily had by simply "staying the course" with a broad market market fund.
In the decade of 1990 through 1999 Vanguard's Equity-Income fund (which is an older fund that I consider to have very similar characteristics to the VYM Dividend Index fund) only had half the returns/growth of Vanguard's S&P 500 fund
The decade that followed wasn't as good (the 500 lost those gains), but the longer term performance was about the same between them. An investor in either fund would have done just fine but someone who tried to jump back and forth rather than "stay the course" had plenty of opportunities to do worse than either. The most important part of being a passive investor is to be "passive", and avoid making the mistakes of switching strategies, which only opens things up to switching again when something starts to unsettle you (and Mr.Market loves to give you reasons to be unsettled and induce mistakes.)
The irony of you saying that about the Tesla addition is that that's exactly the same thing that made me start even thinking about this in the first place.

I notice that in your sig you have a Benjamin Graham quote, and earlier this year I read his book, the Intelligent Investor. Amazing book. I don't remember exactly what chapter it was and don't have the book on me right now, but somewhere in the book Graham states that over a long period of time, buying stocks with a low p/e does better with buying stocks with high p/e (ex: growth stocks). Based on this, do you think that Graham himself would be okay with investing in value index funds only?

No, I don't. I think Graham would give the same advice his protege Warren Buffett gives for most investors, which is just to buy an S&P 500 (or other broad market) index fund, emphasizing the diversification of the portfolio - not trying to be overly selective.
Benjamin Graham in The Intelligent Investor wrote: ... this matter of choosing the “best” stocks is at bottom a highly controversial one. Our advice to the defensive investor is that he let it alone. Let him emphasize diversification more than individual selection. Incidentally, the universally accepted idea of diversification is, in part at least, the negation of the ambitious pretensions of selectivity. If one could select the best stocks unerringly, one would only lose by diversifying. Yet within the limits of the four most general rules of common-stock selection suggested for the defensive investor there is room for a rather considerable freedom of preference. At the worst the indulgence of such preferences should do no harm; beyond that, it may add something worthwhile to the results. With the increasing impact of technological developments on long-term corporate results, the investor cannot leave them out of his calculations. Here, as elsewhere, he must seek a mean between neglect and overemphasis.

...

...Investment policy, as it has been developed here, depends in the first place on a choice by the investor of either the defensive (passive) or aggressive (enterprising) role. The aggressive investor must have a considerable knowledge of security values—enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise. There is no room in this philosophy for a middle ground, or a series of gradations, between the passive and aggressive status. Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.
As an investor you cannot soundly become “half a businessman,” expecting thereby to achieve half the normal rate of business profits on your funds.
It follows from this reasoning that the majority of security owners should elect the defensive classification. They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi-business. They should therefore be satisfied with the excellent return now obtainable from a defensive portfolio (and with even less), and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Considering Investing in Value Only - Thoughts

Post by 000 »

I think it's a reasonable move to make, however I'm not sure naive value investing really works. A lot of value funds hold a lot of junk IMO. I think I'd rather tilt to international and/or US small caps and/or specific sectors, subsectors, or individual stocks than a fund with "value" in the name.
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JSPECO9
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Re: Considering Investing in Value Only - Thoughts

Post by JSPECO9 »

Thank you guys for all of the responses :sharebeer
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Re: Considering Investing in Value Only - Thoughts

Post by absolute zero »

000 wrote: Sat Dec 19, 2020 5:14 pm I think it's a reasonable move to make, however I'm not sure naive value investing really works. A lot of value funds hold a lot of junk IMO. I think I'd rather tilt to international and/or US small caps and/or specific sectors, subsectors, or individual stocks than a fund with "value" in the name.
+1 on the part that I bolded above

I hold 20% in VIOV, and it’s admittedly a recent addition, but my impression is that investors should not incorporate value exposure unless they feel extremely compelled by the concept of value investing.

I have been fascinated over the past year as I’ve learned about value, and feel convinced that a tilt to SCV is a good fit for me. OTOH, people that need to ask the internet whether they should tilt to value are probably more likely to abandon the tilt at some point in the future (quite possibly an inopportune time).

EDIT: after re-reading your post 000, I realize that you were criticizing value itself. My criticism was more about the “naive” part....specifically the naivety of certain investors, not the strategies that they employ.
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Re: Considering Investing in Value Only - Thoughts

Post by 000 »

absolute zero wrote: Sat Dec 19, 2020 5:37 pm
000 wrote: Sat Dec 19, 2020 5:14 pm I think it's a reasonable move to make, however I'm not sure naive value investing really works. A lot of value funds hold a lot of junk IMO. I think I'd rather tilt to international and/or US small caps and/or specific sectors, subsectors, or individual stocks than a fund with "value" in the name.
+1 on the part that I bolded above

I hold 20% in VIOV, and it’s admittedly a recent addition, but my impression is that investors should not incorporate value exposure unless they feel extremely compelled by the concept of value investing.

I have been fascinated over the past year as I’ve learned about value, and feel convinced that a tilt to SCV is a good fit for me. OTOH, people that need to ask the internet whether they should tilt to value are probably more likely to abandon the tilt at some point in the future (quite possibly an inopportune time).

EDIT: after re-reading your post 000, I realize that you were criticizing value itself. My criticism was more about the “naive” part....specifically the naivety of certain investors, not the strategies that they employ.
No, I'm not criticizing value itself. I AM criticizing just naively buying a bunch of low P/E stocks without considering that most of them are probably fairly valued (e.g. Regional Banks and Insurers). So I don't think value indexing really works.
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Re: Considering Investing in Value Only - Thoughts

Post by 000 »

FWIW I define value stocks as stocks that are underappreciated by current investor sentiment relative to future fundamentals. This doesn't have much to do with P/B, P/E and other naive screens in a typical value index fund.
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Re: Considering Investing in Value Only - Thoughts

Post by Register44 »

:arrow:
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Re: Considering Investing in Value Only - Thoughts

Post by rockstar »

JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
I'm blindly investing in QQQ.

What is value? If you can't explain what you're investing in, then I wouldn't.
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Re: Considering Investing in Value Only - Thoughts

Post by langlands »

There are two distinct types of investing that confusingly both go under the name "value investing."

One is the Benjamin Graham/Warren Buffett style investing that emphasizes finding securities that are underpriced relative to intrinsic value. This has always seemed somewhat of a vacuous statement to me since it seems that's what every investor should do: find something that you think is worth more than the market currently prices it. But the idea I think is to avoid speculation about the future (future growth potential) and focus on concrete things that the market is pricing incorrectly, e.g. a strong solid business which has just suffered a bad news cycle (scandal of some sort) or is just out of fashion.

The other is the factor value investing framework popularized by French and Fama's academic research. This is the type of value investing most Bogleheads are talking about and which all the SCV funds are replicating. I won't elaborate further since there are already plenty of threads on it.

There are certainly overlaps in the two styles (both would avoid TSLA like the plague obviously), but the Buffett style is ultimately still about beating the market by finding inefficiently priced securities while the latter is a fully mechanical procedure for harvesting the so called "value premium" on which many academic papers have been published. I suspect 000 is in favor of the former and skeptical of the latter.
Last edited by langlands on Sat Dec 19, 2020 6:08 pm, edited 3 times in total.
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Re: Considering Investing in Value Only - Thoughts

Post by garlandwhizzer »

I personally also have concerns about what I consider to be frothy sentiment in hot growth stocks and the tilting of cap weight indexes toward high beta tech which is selling at sky high PEs. Vanguard currently lists TSM at 26.2% tech but this is misleading. 6 of TSMs top 10 holdings are what I call high beta mega cap tech. Vanguard however calls GOOG, FB, and Netflix communication sector stocks instead of tech sector so that 26.2% figure is IMO misleading and low.

On the other hand if we chose to avoid exposure of what looked to be overpriced mega-cap tech growth stocks over the last decade, we paid for it with much lower returns. It may not make sense to us but that is what happened. Expensive stocks kept on getting more expensive and cheap stocks kept on getting cheaper until recently when we've seen a modest rally in value, especially SCV.

Personally I've chosen to hold TSM as my core holding in US equity (75%) because I know it's exceptionally difficult to outsmart the market long term. Most who try will fail. There's a reason why beta is hands down the best factor to own. I usually hold 25% SCV but I quit rebalancing into it years ago because it appeared to be throwing good money after bad. The atrophy of SCV relative to TSM took my SCV allocation down to 18%, but the disparity between valuations of growth and value grew so large that some months ago I switched back to a full 25% SCV plus a 5% increase in LCV. I did this not primarily for expected long term future outperformance but rather to decrease equity risk in a market that has frothy growth segments.

The PE of Vanguard's Growth Index ETF which is dominated by mega-cap tech is currently 42.4. That means that 2021 profits have to increase almost 50% just to maintain this ridiculously high PE. A lot of things could happen in the next 12 months to prevent that from happening. Investors have chosen to think of these stocks as risk free money printing presses, and they have done very well in the past relative to value stocks during difficult macroeconomic circumstances. The question is: is that same profit growth rate differential between growth and value stocks sustainable long term? I believe that is highly uncertain. I want to hold both growth and value in sufficient quantity that regardless of what happens I won't suffer excessively.

Garland Whizzer
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Re: Considering Investing in Value Only - Thoughts

Post by absolute zero »

000 wrote: Sat Dec 19, 2020 5:50 pm FWIW I define value stocks as stocks that are underappreciated by current investor sentiment relative to future fundamentals. This doesn't have much to do with P/B, P/E and other naive screens in a typical value index fund.
But future fundamentals aren’t knowable. So I’m not sure how that’s any more useful than just saying “I define value as the stocks that will have the best returns over the next 20 years.”
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Re: Considering Investing in Value Only - Thoughts

Post by Noobvestor »

anon_investor wrote: Sat Dec 19, 2020 3:54 pm
JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
You could be wrong and growth keeps going up and value under performs... VTSAX means you have everything.
Actually, VTWAX has everything. US stocks are highly valued - global stocks appear more value-priced to me. But who knows so I'll stay diversified.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Considering Investing in Value Only - Thoughts

Post by nisiprius »

The reason I think that it is a questionable idea for you is that you are doing it now, for reasons that you think have to do with conditions now: "current valuations of large-cap growth stocks." That is to say, you intend to time the market for factors. You think growth stocks are too high so you want to go to value, just as a general market timer might think stocks are too high and want to go to cash.

Well, you might be right or wrong. You should take the time to read John C. Bogle's essay, 2002 version available at no cost, The Telltale Chart; updated in 2010 in his book, Don't Count On It. Read section 2, "2. RTM – Value Stocks vs. Growth Stocks." This essay has been criticized in this forum. I personally think it's valid, you may not, but at least read it. Bogle believed that the performance of value stocks and growth stocks exhibited mean reversion, and that the two could be expected to leapfrog each other with neither having any advantage in the long term. Of course, if you believe you can market time the value factor and be in it only for the periods when it is outperforming, then it would be rational to do it; but do you really believe that?

Anyway. Stocks are stocks. (And, by the way, a value index fund is not at all the same thing as being a "value investor," but I don't want to go down that rabbit hole here. I see langlands has commented on it above). If you can make a permanent commitment to devote part or all of your portfolio into a value index fund and stick to it, I don't think anyone can say for sure if that will turn out better or worse over the next twenty or thirty years. I imagine your chances of hitting your retirement number with if you save an appropriate percentage of your salary, and/or being able to sustain 3.5% withdrawals in retirement, are just about as good whether the stock portion of the portfolio is Total Stock or Value Index.

But you have to decide carefully. Do you plan to stick to value only forever? If not, then exactly what are you doing? Do you think you can "time the market" and sense when the good and bad times for value are? How carefully have you looked into whether people are really able to do this?

Also, the S&P 500 is always invested predominantly in a relatively small number of stocks; which they are and what category they are in varies. People who don't know this can be taken advantage of Periodically, when someone wants to stir the pot they will point it out and view it with alarm. Oh, my gosh! This is unprecedented, this is dangerous, do something! But you need to decide up front. Have I decided to mirror the market, or not? If you've decided to mirror the market, that's that. Sometimes the market looks that way. It's just the way some things in nature are distributed.

For example, an educated speaker knows 40,000 English words--yet uses only ten of them for 25% of what they write. Yes, 25% of Shakespeare is nothing but the words "the," "be," "to," "of," "and," "a," "in," "that," "have," and "I!" Horror! Would Shakespeare have been a better writer if he'd used "the" a little less often and "usufruct" a little more often? No.
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Re: Considering Investing in Value Only - Thoughts

Post by HawkeyePierce »

Switching to value only means overweighting sectors like retail. Do you really want to be overweight shopping malls?

(I tilt to SCV but value is not a free lunch)
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Re: Considering Investing in Value Only - Thoughts

Post by 000 »

absolute zero wrote: Sat Dec 19, 2020 6:14 pm
000 wrote: Sat Dec 19, 2020 5:50 pm FWIW I define value stocks as stocks that are underappreciated by current investor sentiment relative to future fundamentals. This doesn't have much to do with P/B, P/E and other naive screens in a typical value index fund.
But future fundamentals aren’t knowable. So I’m not sure how that’s any more useful than just saying “I define value as the stocks that will have the best returns over the next 20 years.”
That's where the active management comes in. It is not a useful definition for passive investing because it requires belief that the market doesn't price everything in correctly and there are still small parts of the stock market with good future business potential (that's what I meant by future fundamentals) yet not overhyped.
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Re: Considering Investing in Value Only - Thoughts

Post by abuss368 »

JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
Welcome to the forum!

You risk underperforming the overall markets. That could be for an extended period of time. Would be you able to handle that?

I would highly recommend focusing on simplicity and owning total market index funds like Total Stock and Total Bond. If you also are interested in international, consider Total International Stock and Total International Bond.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
mindboggling
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Re: Considering Investing in Value Only - Thoughts

Post by mindboggling »

000 wrote: Sat Dec 19, 2020 5:14 pm I think it's a reasonable move to make, however I'm not sure naive value investing really works. A lot of value funds hold a lot of junk IMO. I think I'd rather tilt to international and/or US small caps and/or specific sectors, subsectors, or individual stocks than a fund with "value" in the name.
I am already retired and as such have only small quantities of new money to invest. However, I have been adding to VEA (International Developed Markets). I have the SP500 and TSM as a tax-loss harvesting pair, and my international is only about 21% of my equities.
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Goldwater85
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Re: Considering Investing in Value Only - Thoughts

Post by Goldwater85 »

I use small value funds only. The value premium is difficult to get adequate exposure to in a long-only fund, and I don’t think there’s any point bothering with a modest tilt.

My equities have also underperformed pure beta funds for years. My international holdings have underperformed my U.S. holdings for years too. I’m fine if that continues indefinitely (not even aiming for outperformance).

I can articulate my logic and am not at all tempted to deviate. If you are unsure enough to be posting on this board, I’d strongly suggest you stick with broad market funds. The best plan is one you can implement.

Btw, not sure how P/E came up, but it is largely useless as a value measure unless you are averaging earnings over a business cycle. E.g., JPM had deeply negative earnings in 2009 (infinite P/E) but was a deep value play. TSLA has a high P/E because investors expect growth—but a mechanical screen can’t tell the difference. Stay away from ‘value’ funds that use P/E as a major metric.
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Re: Considering Investing in Value Only - Thoughts

Post by absolute zero »

Goldwater85 wrote: Sat Dec 19, 2020 6:33 pm
Btw, not sure how P/E came up, but it is largely useless as a value measure unless you are averaging earnings over a business cycle. E.g., JPM had deeply negative earnings in 2009 (infinite P/E) but was a deep value play. TSLA has a high P/E because investors expect growth—but a mechanical screen can’t tell the difference. Stay away from ‘value’ funds that use P/E as a major metric.
My understanding is that most funds use a blend of a few metrics. I liked Cliff Asness’s description - use “price to anything reasonable” - could be price to book, price to earnings, price to sales, etc, etc. He also points out that it’s unknowable which metric will perform best in the future, and so it’s likely best to use a blend of several metrics instead of a single one.
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JSPECO9
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Re: Considering Investing in Value Only - Thoughts

Post by JSPECO9 »

garlandwhizzer wrote: Sat Dec 19, 2020 6:06 pm I personally also have concerns about what I consider to be frothy sentiment in hot growth stocks and the tilting of cap weight indexes toward high beta tech which is selling at sky high PEs. Vanguard currently lists TSM at 26.2% tech but this is misleading. 6 of TSMs top 10 holdings are what I call high beta mega cap tech. Vanguard however calls GOOG, FB, and Netflix communication sector stocks instead of tech sector so that 26.2% figure is IMO misleading and low.

On the other hand if we chose to avoid exposure of what looked to be overpriced mega-cap tech growth stocks over the last decade, we paid for it with much lower returns. It may not make sense to us but that is what happened. Expensive stocks kept on getting more expensive and cheap stocks kept on getting cheaper until recently when we've seen a modest rally in value, especially SCV.

Personally I've chosen to hold TSM as my core holding in US equity (75%) because I know it's exceptionally difficult to outsmart the market long term. Most who try will fail. There's a reason why beta is hands down the best factor to own. I usually hold 25% SCV but I quit rebalancing into it years ago because it appeared to be throwing good money after bad. The atrophy of SCV relative to TSM took my SCV allocation down to 18%, but the disparity between valuations of growth and value grew so large that some months ago I switched back to a full 25% SCV plus a 5% increase in LCV. I did this not primarily for expected long term future outperformance but rather to decrease equity risk in a market that has frothy growth segments.

The PE of Vanguard's Growth Index ETF which is dominated by mega-cap tech is currently 42.4. That means that 2021 profits have to increase almost 50% just to maintain this ridiculously high PE. A lot of things could happen in the next 12 months to prevent that from happening. Investors have chosen to think of these stocks as risk free money printing presses, and they have done very well in the past relative to value stocks during difficult macroeconomic circumstances. The question is: is that same profit growth rate differential between growth and value stocks sustainable long term? I believe that is highly uncertain. I want to hold both growth and value in sufficient quantity that regardless of what happens I won't suffer excessively.

Garland Whizzer
This is just frightening to me. And it's not that I plan on selling, because I think that's just as dumb as well, but I don't know how I feel about investing money into mature stocks with multiples that high.
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Re: Considering Investing in Value Only - Thoughts

Post by hayman »

When one of these tech companies figure out general artificial intelligence or quantum computing, you will want to have money in it.
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Re: Considering Investing in Value Only - Thoughts

Post by Register44 »

:arrow:
Last edited by Register44 on Mon Jan 11, 2021 8:43 pm, edited 1 time in total.
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JoMoney
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Re: Considering Investing in Value Only - Thoughts

Post by JoMoney »

When looking at P/E ratios, one really needs to consider the environment we're in.
Earnings fell off a cliff this year. Most anticipate better earnings going forward then the trailing quarter or year.

In January of 2009 the P/E the S&P 500 had a P/E of 70.91 - and that was a great time to be buying.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Considering Investing in Value Only - Thoughts

Post by Register44 »

:arrow:
Last edited by Register44 on Mon Jan 11, 2021 8:43 pm, edited 1 time in total.
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Re: Considering Investing in Value Only - Thoughts

Post by whereskyle »

JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
Imo, a value only index fund is not as you put it "acceptable." If you need some consolation, just know that when Coca Cola was a growth stock there was virtually no price too high to accurately capture it's forward potential. Might just be the case with many of the companies you think are expensive. There's still a real possibility all of us are buying FAANG for prices below their true future value.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Register44
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Re: Considering Investing in Value Only - Thoughts

Post by Register44 »

:arrow:
Last edited by Register44 on Mon Jan 11, 2021 8:43 pm, edited 1 time in total.
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JSPECO9
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Re: Considering Investing in Value Only - Thoughts

Post by JSPECO9 »

nisiprius wrote: Sat Dec 19, 2020 6:18 pm The reason I think that it is a questionable idea for you is that you are doing it now, for reasons that you think have to do with conditions now: "current valuations of large-cap growth stocks." That is to say, you intend to time the market for factors. You think growth stocks are too high so you want to go to value, just as a general market timer might think stocks are too high and want to go to cash.

Well, you might be right or wrong. You should take the time to read John C. Bogle's essay, 2002 version available at no cost, The Telltale Chart; updated in 2010 in his book, Don't Count On It. Read section 2, "2. RTM – Value Stocks vs. Growth Stocks." This essay has been criticized in this forum. I personally think it's valid, you may not, but at least read it. Bogle believed that the performance of value stocks and growth stocks exhibited mean reversion, and that the two could be expected to leapfrog each other with neither having any advantage in the long term. Of course, if you believe you can market time the value factor and be in it only for the periods when it is outperforming, then it would be rational to do it; but do you really believe that?

Anyway. Stocks are stocks. (And, by the way, a value index fund is not at all the same thing as being a "value investor," but I don't want to go down that rabbit hole here. I see langlands has commented on it above). If you can make a permanent commitment to devote part or all of your portfolio into a value index fund and stick to it, I don't think anyone can say for sure if that will turn out better or worse over the next twenty or thirty years. I imagine your chances of hitting your retirement number with if you save an appropriate percentage of your salary, and/or being able to sustain 3.5% withdrawals in retirement, are just about as good whether the stock portion of the portfolio is Total Stock or Value Index.

But you have to decide carefully. Do you plan to stick to value only forever? If not, then exactly what are you doing? Do you think you can "time the market" and sense when the good and bad times for value are? How carefully have you looked into whether people are really able to do this?

Also, the S&P 500 is always invested predominantly in a relatively small number of stocks; which they are and what category they are in varies. People who don't know this can be taken advantage of Periodically, when someone wants to stir the pot they will point it out and view it with alarm. Oh, my gosh! This is unprecedented, this is dangerous, do something! But you need to decide up front. Have I decided to mirror the market, or not? If you've decided to mirror the market, that's that. Sometimes the market looks that way. It's just the way some things in nature are distributed.

For example, an educated speaker knows 40,000 English words--yet uses only ten of them for 25% of what they write. Yes, 25% of Shakespeare is nothing but the words "the," "be," "to," "of," "and," "a," "in," "that," "have," and "I!" Horror! Would Shakespeare have been a better writer if he'd used "the" a little less often and "usufruct" a little more often? No.
Great read. I definitely needed this. Thank you.
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Re: Considering Investing in Value Only - Thoughts

Post by averagedude »

Being balanced in my stock investing has served me well over the last 3 decades. This is what I recommend, but if you do tilt one way or the other, make it a small tilt. I'm sure that their are few people who sit back after investing in the market for 30+ years, say that they weren't able to accomplish their goals because they didn't tilt their portfolios to a certain style box.
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Re: Considering Investing in Value Only - Thoughts

Post by TheLaughingCow »

JoMoney wrote: Sat Dec 19, 2020 7:09 pm When looking at P/E ratios, one really needs to consider the environment we're in.
Earnings fell off a cliff this year. Most anticipate better earnings going forward then the trailing quarter or year.

In January of 2009 the P/E the S&P 500 had a P/E of 70.91 - and that was a great time to be buying.
Have they? My understanding was that big tech such as Amazon and Facebook was having better earnings than ever.
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JoMoney
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Re: Considering Investing in Value Only - Thoughts

Post by JoMoney »

TheLaughingCow wrote: Sat Dec 19, 2020 11:17 pm
JoMoney wrote: Sat Dec 19, 2020 7:09 pm When looking at P/E ratios, one really needs to consider the environment we're in.
Earnings fell off a cliff this year. Most anticipate better earnings going forward then the trailing quarter or year.

In January of 2009 the P/E the S&P 500 had a P/E of 70.91 - and that was a great time to be buying.
Have they? My understanding was that big tech such as Amazon and Facebook was having better earnings than ever.
Reported earnings first and second quarter of 2020 were less than half what they were for 2019 on the S&P 500
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Considering Investing in Value Only - Thoughts

Post by Goldwater85 »

Register44 wrote: Sat Dec 19, 2020 7:06 pm
Goldwater85 wrote: Sat Dec 19, 2020 6:33 pm I use small value funds only. The value premium is difficult to get adequate exposure to in a long-only fund, and I don’t think there’s any point bothering with a modest tilt.

My equities have also underperformed pure beta funds for years. My international holdings have underperformed my U.S. holdings for years too. I’m fine if that continues indefinitely (not even aiming for outperformance).

I can articulate my logic and am not at all tempted to deviate. If you are unsure enough to be posting on this board, I’d strongly suggest you stick with broad market funds. The best plan is one you can implement.

Btw, not sure how P/E came up, but it is largely useless as a value measure unless you are averaging earnings over a business cycle. E.g., JPM had deeply negative earnings in 2009 (infinite P/E) but was a deep value play. TSLA has a high P/E because investors expect growth—but a mechanical screen can’t tell the difference. Stay away from ‘value’ funds that use P/E as a major metric.
Curious if you would share why you would continue to hold the small only if your not trying for the premia.

Edit: I realized the "not aiming for outperformance" was in relation to the international holding. In that regard then I understand and share your logic. Diversification.
I meant it in reference to both approaches. But yes, diversification.

I view beta (broad market returns), size and value to be independent sources of risk/return that aren’t perfectly correlated. I also believe you can reduce portfolio correlations even further by spreading exposure to all three across geography.

The goal is to minimIze the odds of catastrophically bad returns as I near retirement. I can afford to accept 10% annual returns in a decade when U.S. Total Market-only investors get 15%. I may not be able to take -2% returns for a decade without downsizing my future lifestyle more than I want—this is just one way of tilting the odds more in favor of decreasing my dispersion of returns.
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Re: Considering Investing in Value Only - Thoughts

Post by Anon9001 »

I only have Value funds as part of my AA although actively managed and with quality exposure. The only thing I would offer you is don't track the portfolio frequently and compare it with some benchmark. Any active strategy will under-perform for short periods of time and you need to have patience to stick with it even when it doesn't seem to work.
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Re: Considering Investing in Value Only - Thoughts

Post by Brianmcg321 »

100% of my portfolio is in value. The other half is in growth. VTSAX and chill.
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Re: Considering Investing in Value Only - Thoughts

Post by bluegill »

I think like you. A roundabout way to value orientation is to invest in EAFE/International. EAFE?international is relatively value oriented compared to US stock market. I am a little over weight International.
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Re: Considering Investing in Value Only - Thoughts

Post by Forester »

JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
Why not simply own the global index ($VT) ? The US has been very good to you and the global index is still over half US stocks. This way you're covered whatever happens.
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nedsaid
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Re: Considering Investing in Value Only - Thoughts

Post by nedsaid »

JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

Seeking guidance. I am not comfortable at all with the current valuations of large-cap growth stocks, as they appeared to have reached 1995-1999 levels. It seems that every single human being alive today is investing blindly into FAANG, Tesla, QQQ, etc. Personally, I'm just not comfortable with it (please let me know if I'm wrong to feel this way).

I have saved up $116k all through VTSAX (Vanguard Total Stock Market) and S&P 500, but noticed how heavily it weighs towards these stocks. I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
If the higher valuations of the FAANG and other High Tech/Internet stocks bug you, you can take a slice of your Total Stock Market and S&P 500 Funds (maybe 20%, you could do 30% if you are bold) and buy Value indexes with the proceeds. International Stocks are cheaper than US Stocks, having a portion of your stocks in International is another way to buy cheaper stocks. Anywhere between 20% and 50% of a stock portfolio in International Stocks is just fine.

Of the International Stocks, the bulk should be in Developed Markets. My enthusiasm for Emerging Markets has cooled somewhat, I would invest but don't overdo it, the reason being is that 40% of Emerging Markets Indexes are Communist China. Maybe 2/3 of International in Developed Markets and maybe 1/3 in Emerging Markets, if you are more conservative, then go 3/4 Developed and 1/4 Emerging.

Whatever you do, don't ignore the large growth stocks. Tilting towards Value doesn't mean abandoning Large Growth. You could split your US and International Stocks 1/2 in the broad indexes and 1/2 in the Value Indexes as Paul Merriman recommends. The Broad "Total" Stock indexes are chock full of the Large Growth companies both here in the U.S. and overseas. I don't think you need such a big Value tilt but I would not go over having 1/2 of my stocks in Value Indexes. I am more cautious, maybe 1/4 or 1/3.
Last edited by nedsaid on Sun Dec 20, 2020 11:31 am, edited 2 times in total.
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William Million
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Re: Considering Investing in Value Only - Thoughts

Post by William Million »

As others have said, doing nothing with your portfolio is an excellent choice.

However, if you want to make some adjustments, I would simply move toward international, as others have mentioned. Growth, and esp tech, have propelled the US market way beyond its previous share of world stocks. Rest of world, which is much more value oriented, will catch up some day. This adjustment will also further diversify your risk.
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Re: Considering Investing in Value Only - Thoughts

Post by LadyGeek »

I removed an off-topic post and reply. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
Please stay on-topic.
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Re: Considering Investing in Value Only - Thoughts

Post by Schlabba »

Goldwater85 wrote: Sun Dec 20, 2020 8:53 am
Register44 wrote: Sat Dec 19, 2020 7:06 pm
Goldwater85 wrote: Sat Dec 19, 2020 6:33 pm I use small value funds only. The value premium is difficult to get adequate exposure to in a long-only fund, and I don’t think there’s any point bothering with a modest tilt.

My equities have also underperformed pure beta funds for years. My international holdings have underperformed my U.S. holdings for years too. I’m fine if that continues indefinitely (not even aiming for outperformance).

I can articulate my logic and am not at all tempted to deviate. If you are unsure enough to be posting on this board, I’d strongly suggest you stick with broad market funds. The best plan is one you can implement.

Btw, not sure how P/E came up, but it is largely useless as a value measure unless you are averaging earnings over a business cycle. E.g., JPM had deeply negative earnings in 2009 (infinite P/E) but was a deep value play. TSLA has a high P/E because investors expect growth—but a mechanical screen can’t tell the difference. Stay away from ‘value’ funds that use P/E as a major metric.
Curious if you would share why you would continue to hold the small only if your not trying for the premia.

Edit: I realized the "not aiming for outperformance" was in relation to the international holding. In that regard then I understand and share your logic. Diversification.
I meant it in reference to both approaches. But yes, diversification.

I view beta (broad market returns), size and value to be independent sources of risk/return that aren’t perfectly correlated. I also believe you can reduce portfolio correlations even further by spreading exposure to all three across geography.

The goal is to minimIze the odds of catastrophically bad returns as I near retirement. I can afford to accept 10% annual returns in a decade when U.S. Total Market-only investors get 15%. I may not be able to take -2% returns for a decade without downsizing my future lifestyle more than I want—this is just one way of tilting the odds more in favor of decreasing my dispersion of returns.
So would you say factor diversification reduces sequence of return risk? And therefore perhaps increases SWR?

[ quoted post and response removed by admin LadyGeek]
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Re: Considering Investing in Value Only - Thoughts

Post by BabaWawa »

JSPECO9 wrote: Sat Dec 19, 2020 3:52 pm Hello Bogleheads,

I was wondering if it is anti-Boglehead to invest only into value index fund only (without selling any of my current holdings obviously, new monies only). If it is acceptable by Bogleheads, what's the right amount of my portfolio, and how to proceed with the approach?

Thank you all for your help.
I would think its pretty much anti-Boglehead to eliminate roughly half of the domestic equities in favor of value stocks. Its OK to moderately tilt to things like small cap and value but it needs to be a life long commitment to that strategy. It also sounds reactionary to me now that we're seeing value start to make a comeback. Whatever you do, put it in writing in your Investment Policy Statement and stay the course.

To get started, if you decide to tilt, just set your allocation to something appropriate like 10-20% of equities. Then you add your new money to that new allocation. Once you reach your desired allocation, you will add new money to any asset that has under-performed. Good luck, but remember there is no perfect portfolio.
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Re: Considering Investing in Value Only - Thoughts

Post by absolute zero »

BabaWawa wrote: Sun Dec 20, 2020 3:33 pm Its OK to moderately tilt to things like small cap and value but it needs to be a life long commitment to that strategy. It also sounds reactionary to me now that we're seeing value start to make a comeback.
Would be interested to hear what data is making you believe that we’re “seeing value start to make a comeback.” There has been some outperformance over the past few months by small caps. But zero recent outperformance by value.
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