Is it foolish to go all in Small Cap Value?

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investyoumust
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Is it foolish to go all in Small Cap Value?

Post by investyoumust »

What could go wrong going all in Small Cap Value?

By investing in Small Cap Value one is fully exposed to market beta anyways (actually slightly more market beta than the total stock market) plus the potential to harvest the additional small and value (and profitability) premiums.

Even if those premiums fail to realize in the future, it is hard to imagine that they should consistently produce a negative premium forever.

If one is able to take on the higher volatility of Small Cap Value, I think it is a pretty sensible decision that is likely to pay off.

Therefore, my portfolio would look something like this:
> 60-70% SPDR MSCI USA Small Cap Value Weighted
> 30-40% SPDR MSCI Europe Small Cap Value Weighted

This should be close to regional market cap weights and, if all the premiums were a fugazi after all, at least capture the global market risk premium.

What do you think?
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Re: Is it foolish to go all in Small Cap Value?

Post by JoMoney »

You have a stronger conviction that the market pays for taking additional risk in the form of efficiently pricing "risk premiums" than I do.
I'm not sure if it's just that I'm more skeptical of promises for extra money (with me providing no additional effort or information), or just that I've seen similar arguments (i.e. people chasing after "high beta" stocks, or small-cap stocks -without other caveats like 'value' or 'profitability' later added on) that never worked out.
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Re: Is it foolish to go all in Small Cap Value?

Post by UpperNwGuy »

Even the advocates of factor investing say that the benefits might not appear for years, maybe decades. Do you have that kind of patience?
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

JoMoney wrote: Thu Jan 20, 2022 6:25 am You have a stronger conviction that the market pays for taking additional risk in the form of efficiently pricing "risk premiums" than I do.
I'm not sure if it's just that I'm more skeptical of promises for extra money (with me providing no additional effort or information), or just that I've seen similar arguments (i.e. people chasing after "high beta" stocks, or small-cap stocks -without other caveats like 'value' or 'profitability' later added on) that never worked out.
I share some of your skepticism.

But apart from enduring higher volatility, I don't see what I would be missing out on by choosing Small Cap Value over the market. I am getting more market beta than the market anyways, and if the other premiums work out, cool, if not, I wouldn't have missed out on anything.
Last edited by investyoumust on Thu Jan 20, 2022 6:35 am, edited 1 time in total.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

UpperNwGuy wrote: Thu Jan 20, 2022 6:28 am Even the advocates of factor investing say that the benefits might not appear for years, maybe decades. Do you have that kind of patience?
I think so. All risky investment strategies require lots of patience.
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Re: Is it foolish to go all in Small Cap Value?

Post by livesoft »

I have a small cap value tilted portfolio. I think one has to buy SCV when it had dropped and sell it when it has excelled -- that is compared to a Total Market Weighted portfolio. The question to me then, is where does the money come from to buy more SCV and where does the money from selling SCV go? There are basically two answers that are not exclusive: (1) Bonds or other fixed income and/or (2) a Total Stock Market weighted portfolio.

Therefore, I believe it is foolish to go all in Small Cap Value. Go into SCV and something else. Play them against each other.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

livesoft wrote: Thu Jan 20, 2022 6:39 am I have a small cap value tilted portfolio. I think one has to buy SCV when it had dropped and sell it when it has excelled -- that is compared to a Total Market Weighted portfolio. The question to me then, is where does the money come from to buy more SCV and where does the money from selling SCV go? There are basically two answers that are not exclusive: (1) Bonds or other fixed income and/or (2) a Total Stock Market weighted portfolio.

Therefore, I believe it is foolish to go all in Small Cap Value. Go into SCV and something else. Play them against each other.
I don't feel comfortable timing these things.

If small cap value results in a premium overall, I don't see a need to jump in and out of it.
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Re: Is it foolish to go all in Small Cap Value?

Post by livesoft »

investyoumust wrote: Thu Jan 20, 2022 6:40 amIf small cap value results in a premium overall, I don't see a need to jump in and out of it.
I guess I wasn't clear: One doesn't jump into it or out of it. One picks a non-100% allocation and rebalances as needed. There is no jump in and no jump out. One always owns some SCV.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

livesoft wrote: Thu Jan 20, 2022 6:44 am I guess I wasn't clear: One doesn't jump into it or out of it. One picks a non-100% allocation and rebalances as needed. There is no jump in and no jump out. One always owns some SCV.
I see. Still, this reduces your overall exposure to these factors, and I don't know whether you can accurately time these things.
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Re: Is it foolish to go all in Small Cap Value?

Post by JoMoney »

investyoumust wrote: Thu Jan 20, 2022 6:32 am
JoMoney wrote: Thu Jan 20, 2022 6:25 am You have a stronger conviction that the market pays for taking additional risk in the form of efficiently pricing "risk premiums" than I do.
I'm not sure if it's just that I'm more skeptical of promises for extra money (with me providing no additional effort or information), or just that I've seen similar arguments (i.e. people chasing after "high beta" stocks, or small-cap stocks -without other caveats like 'value' or 'profitability' later added on) that never worked out.
I share some of your skepticism.

But apart from enduring higher volatility, I don't see what I would be missing out on by choosing Small Cap Value over the market. I am getting more market beta than the market anyways, and if the other premiums work out, cool, if not, I wouldn't have missed out on anything.
Your use of the term "beta" and seeming desire for more of that, sounds like you don't share the same belief I do. It's pretty explicitly part of the same market model, which has been (repeatedly) a failure over time at least as far as chasing higher returns go. That's not to say that stocks haven't had higher returns, it's that efficiently priced "risk premiums" haven't explained it, and the popularized strategies that have focused on increasing exposures to those modeled risks (and they keep adding new ones) have repeatedly failed.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

JoMoney wrote: Thu Jan 20, 2022 6:51 am
Your use of the term "beta" and seeming desire for more of that, sounds like you don't share the same belief I do. It's pretty explicitly part of the same market model, which has been (repeatedly) a failure over time at least as far as chasing higher returns go. That's not to say that stocks haven't had higher returns, it's that efficiently priced "risk premiums" haven't explained it, and the popularized strategies that have focused on increasing exposures to those modeled risks (and they keep adding new ones) have repeatedly failed.
The Fama French 3/5 Factor model has explained over 90% of the differences in returns between diversified portfolios.

It may well be that those premiums will be much smaller than observed in the data, but that still doesn't mean that you are doing any harm (except accepting more volatility) by trying to get more exposure to them.
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Re: Is it foolish to go all in Small Cap Value?

Post by Jack FFR1846 »

Some time ago, I watched an interview with Jack Bogle where he talked about SCV. Now, SCV still seems to be a golden, hidden gem that nobody knows about when I read about it in forums. Jack said that decades ago, it was thought to be this and because of that, investors bought it, and bought it and jacked the price way up. So today, it's not only not a gem, but it's a real dud.

I did a quick yahoo chart with VTI and VBR over the last 5 years. VTI gained double what VBR gained.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Jack FFR1846 wrote: Thu Jan 20, 2022 6:58 am I did a quick yahoo chart with VTI and VBR over the last 5 years. VTI gained double what VBR gained.
Why would we expect that going forward? What is it about VBR that we believe will cause it to underperform forever?
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Re: Is it foolish to go all in Small Cap Value?

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investyoumust wrote: Thu Jan 20, 2022 5:36 am What could go wrong going all in Small Cap Value?

By investing in Small Cap Value one is fully exposed to market beta anyways (actually slightly more market beta than the total stock market) plus the potential to harvest the additional small and value (and profitability) premiums.

Even if those premiums fail to realize in the future, it is hard to imagine that they should consistently produce a negative premium forever.

If one is able to take on the higher volatility of Small Cap Value, I think it is a pretty sensible decision that is likely to pay off.

Therefore, my portfolio would look something like this:
> 60-70% SPDR MSCI USA Small Cap Value Weighted
> 30-40% SPDR MSCI Europe Small Cap Value Weighted

This should be close to regional market cap weights and, if all the premiums were a fugazi after all, at least capture the global market risk premium.

What do you think?
If I were going "all in" on stocks, I would prefer a 50-50 SCV / Minimum Volatility barbell portfolio, if small cap value turns out to be a poor bet, I'd be rebalancing from strong defensive stocks into weak cyclicals, which would paper over the cracks...
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Re: Is it foolish to go all in Small Cap Value?

Post by nisiprius »

investyoumust wrote: Thu Jan 20, 2022 5:36 am What could go wrong going all in Small Cap Value? ...
Even if those premiums fail to realize in the future, it is hard to imagine that they should consistently produce a negative premium forever.

If one is able to take on the higher volatility of Small Cap Value, I think it is a pretty sensible decision that is likely to pay off.
Whether it is foolish or not depends on the individual investor, what kind of calculated risk they think they are taking, and whether their appraisal of the risk and return are reasonable.

It isn't foolish to take a calculated risk.

It is foolish to take a miscalculated risk.

Based on what you have written, you do not seem to think you are taking on any more risk in 100% small-cap value than you would be taking in a total market index fund. You seem to think there is virtually no chance of making less than you make in the total market, and a good chance of making more.

I read your challenge, "what could go wrong," as a way of saying you do not think anything important to you could go wrong.

So, if I can translate this: You think you have found a free lunch.

Another point is that you don't address goals. One thing that could go wrong is that you could take additional risk in order to make more money when you don't actually have a need to make more money.

In your discussion, you have not mentioned any factor that result in failure to carry through the plan. If your strategy depends on holding 100% small-cap value for thirty years, then what could go wrong is that you might not succeed in holding 100% small-cap value for thirty years.

Another issue is that small-cap value is not the only way to boost expected return. Consider the following reasoning:

a) I don't think anything can go seriously wrong with a plan to hold 100% stocks for thirty years.
b) Therefore, I don't think anything can go seriously wrong with a plan to hold 100% small-cap value for thirty years.
c) Therefore, I don't think anything can go seriously wrong with a plan to hold 2X leveraged small-cap value for thirty years.

Is this reasoning faulty? If so, why?
Last edited by nisiprius on Thu Jan 20, 2022 7:12 am, edited 3 times in total.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Forester wrote: Thu Jan 20, 2022 7:01 am
If I were going "all in" on stocks, I would prefer a 50-50 SCV / Minimum Volatility barbell portfolio, if small cap value turns out to be a poor bet, I'd be rebalancing from strong defensive stocks into weak cyclicals, which would paper over the cracks...
You're right. It's more of a defensive play.

Looking at the Fama French 5 Factor model exposure of USMV, it has a market beta of 0.74, negative size and value loadings, and positive profitability and investment loadings.
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Re: Is it foolish to go all in Small Cap Value?

Post by jeffyscott »

investyoumust wrote: Thu Jan 20, 2022 5:36 amplus the potential to harvest the additional small and value (and profitability) premiums.
Hasn't the "small premium" been revised to be minimal or non-existent?
https://www.aqr.com/Insights/Perspectiv ... ly-Edition

I'd be more comfortable just going all value or over-weighting it via using fundamental index funds (e.g. Schwab's SFLNX and SFSNX for US, etc.).
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

nisiprius wrote: Thu Jan 20, 2022 7:06 am Whether it is foolish or not depends on the individual investor, what kind of calculated risk they think they are taking, and whether their appraisal of the risk and return are reasonable.

It isn't foolish to take a calculated risk. It is foolish to take a miscalculated risk.

Based on what you have written, you do not seem to think you are taking on any more risk in 100% small-cap value than you would be taking in a total market index fund. You seem to think there is virtually no chance of making less than you make in the total market, and a good chance of making more.

I read your challenge, "what could go wrong," as a way of saying you do not think anything important to you could go wrong. You think you have found a free lunch. Possibly, although you don't say this, because you think that a long holding period erases the additional risk that many people think there is in small-cap value.

You have not addressed the question of risk tolerance, or any other factor that might result in your failing to stay the course in small-cap value for a suitably long period of time. If your strategy depends on holding 100% small-cap value for thirty years, then what could go wrong is that you might not succeed in holding 100% small-cap value for thirty years.

Another issue is that small-cap value is not the only way to boost expected return. Consider the following reasoning:

a) I don't think anything can go seriously wrong with a plan to hold 100% stocks for thirty years.
b) Therefore, I don't think anything can go seriously wrong with a plan to hold 100% small-cap value for thirty years.
c) Therefore, I don't think anything can go seriously wrong with a plan to hold 2X leveraged small-cap value for thirty years.

Is it faulty? Why?
I think for most private investors it is much more realistic to achieve higher returns through calculated concentration than through leverage.

Access to leverage is often 100% correlated to the overall market, so if you are forced to sell at the worst time possible, you can't "wait out" the bad times.

I think by having a sufficiently large emergency fund one should be able to sit out most bad times.
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

I'm guessing you are in Europe - do you have access to Avantis ETFs?
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Re: Is it foolish to go all in Small Cap Value?

Post by JoMoney »

investyoumust wrote: Thu Jan 20, 2022 6:56 am
JoMoney wrote: Thu Jan 20, 2022 6:51 am
Your use of the term "beta" and seeming desire for more of that, sounds like you don't share the same belief I do. It's pretty explicitly part of the same market model, which has been (repeatedly) a failure over time at least as far as chasing higher returns go. That's not to say that stocks haven't had higher returns, it's that efficiently priced "risk premiums" haven't explained it, and the popularized strategies that have focused on increasing exposures to those modeled risks (and they keep adding new ones) have repeatedly failed.
The Fama French 3/5 Factor model has explained over 90% of the differences in returns between diversified portfolios.

It may well be that those premiums will be much smaller than observed in the data, but that still doesn't mean that you are doing any harm (except accepting more volatility) by trying to get more exposure to them.
Uh, sure. If the market is efficient, any wild assortment of stocks can be called efficient.
And if you like getting slapped in the face, you're free to conclude that doesn't cause "any harm (except accepting more slaps in the face)" either.
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Re: Is it foolish to go all in Small Cap Value?

Post by donaldfair71 »

investyoumust wrote: Thu Jan 20, 2022 6:47 am
livesoft wrote: Thu Jan 20, 2022 6:44 am I guess I wasn't clear: One doesn't jump into it or out of it. One picks a non-100% allocation and rebalances as needed. There is no jump in and no jump out. One always owns some SCV.
I see. Still, this reduces your overall exposure to these factors, and I don't know whether you can accurately time these things.
It isn’t timing them if you’re rebalancing. It’s rebalancing to control for risk, and some (klangfool comes to mind) have posted about doing it for rebalance bonus.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

jeffyscott wrote: Thu Jan 20, 2022 7:10 am
Hasn't the "small premium" been revised to be minimal or non-existent?
https://www.aqr.com/Insights/Perspectiv ... ly-Edition

I'd be more comfortable just going all value or over-weighting it via using fundamental index funds (e.g. Schwab's SFLNX and SFSNX for US, etc.).
True. But, if you take out the worst possible small cap stocks (lottery stocks: growth, unprofitable) small caps still generate a premium. Also, value is stronger in small caps.

The large cap value premium is statistically insignificant.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 7:14 am do you have access to Avantis ETFs?
Nope, just the SPDR Small Cap Value Weighted ETFs.
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Re: Is it foolish to go all in Small Cap Value?

Post by tvubpwcisla »

Going all in on Small Cap Value is better than not investing at all.

It could turn out great. Please update us on how things go for you.
Last edited by tvubpwcisla on Thu Jan 20, 2022 7:19 am, edited 1 time in total.
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Re: Is it foolish to go all in Small Cap Value?

Post by BitTooAggressive »

investyoumust wrote: Thu Jan 20, 2022 5:36 am What could go wrong going all in Small Cap Value?

By investing in Small Cap Value one is fully exposed to market beta anyways (actually slightly more market beta than the total stock market) plus the potential to harvest the additional small and value (and profitability) premiums.

Even if those premiums fail to realize in the future, it is hard to imagine that they should consistently produce a negative premium forever.

If one is able to take on the higher volatility of Small Cap Value, I think it is a pretty sensible decision that is likely to pay off.

Therefore, my portfolio would look something like this:
> 60-70% SPDR MSCI USA Small Cap Value Weighted
> 30-40% SPDR MSCI Europe Small Cap Value Weighted

This should be close to regional market cap weights and, if all the premiums were a fugazi after all, at least capture the global market risk premium.

What do you think?
Yes it’s foolish. I invest in Vanguard’s small cap value fund, but also small cap blend, total US market, total international, short term bonds,….

I would not advocate going all into any single investment class.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

JoMoney wrote: Thu Jan 20, 2022 7:14 am Uh, sure. If the market is efficient, any wild assortment of stocks can be called efficient.
And if you like getting slapped in the face, you're free to conclude that doesn't cause "any harm (except accepting more slaps in the face)" either.
Well, historically you have been compensated for accepting these specific slaps in the face.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

donaldfair71 wrote: Thu Jan 20, 2022 7:16 am
It isn’t timing them if you’re rebalancing. It’s rebalancing to control for risk, and some (klangfool comes to mind) have posted about doing it for rebalance bonus.
Sure, but it also lowers your factor exposure, which will lower your returns if small cap value does well.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

tvubpwcisla wrote: Thu Jan 20, 2022 7:18 am Going all in on Small Cap Value is better than not investing at all.

It could turn out great. Please update us on how things go for you.
Will do. :beer
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Re: Is it foolish to go all in Small Cap Value?

Post by onourway »

Jack FFR1846 wrote: Thu Jan 20, 2022 6:58 am Some time ago, I watched an interview with Jack Bogle where he talked about SCV. Now, SCV still seems to be a golden, hidden gem that nobody knows about when I read about it in forums. Jack said that decades ago, it was thought to be this and because of that, investors bought it, and bought it and jacked the price way up. So today, it's not only not a gem, but it's a real dud.

I did a quick yahoo chart with VTI and VBR over the last 5 years. VTI gained double what VBR gained.
I think you need to read this closely @investyoumust. SCV is no longer a secret - far from it. Therefore the rational response is that it will no longer outperform.

You really need to consider how you would feel if you'd been invested 100% in SCV over the past 5 years and weathered this kind of disparity. I consider myself an exceptionally detached long-term, passive investor, and I think it would eat me up every day once I realized what had (and was) happening. A huge part of what makes long-term, total market investing comparatively easy is that it prevents these kind of situations from happening. I never compare my returns to anything else because I know that there will always be individual stocks and sectors that temporarily outperform, but I also know that I own part of them and (as long as I keep my hands off) I will get the total market return.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

BitTooAggressive wrote: Thu Jan 20, 2022 7:18 am Yes it’s foolish. I invest in Vanguard’s small cap value fund, but also small cap blend, total US market, total international, short term bonds,….

I would not advocate going all into any single investment class.
I think a case can be made that Small Cap Value should have higher expected returns than small blend, total market or short term bonds...
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

onourway wrote: Thu Jan 20, 2022 7:21 am I think you need to read this closely @investyoumust. SCV is no longer a secret - far from it. Therefore the rational response is that it will no longer outperform.

You really need to consider how you would feel if you'd been invested 100% in SCV over the past 5 years and weathered this kind of disparity. I consider myself an exceptionally detached long-term, passive investor, and I think it would eat me up every day once I realized what had (and was) happening. A huge part of what makes long-term, total market investing comparatively easy is that it prevents these kind of situations from happening. I never compare my returns to anything else because I know that there will always be individual stocks and sectors that temporarily outperform, but I also know that I own part of them and (as long as I keep my hands off) I will get the total market return.
Well, if there is a specific risk to small cap value that some people are rationally willing to avoid, it should continue to work even if it isn't a secret.

I think tracking error regret is real, but I can tell myself that I am still globally diversified across thousands of companies, so it is unlikely that they will all do terribly long-term.
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

To go 100% SCV you have to have an extremely emotionless, analytical, mechanical, robot-like brain which has no reaction to piling money into an asset that continually underperforms the broad market year after year after year after year after year after year after year after year after year after year... until, SCV gives you head fake with some decent returns and then goes back into dormancy and more years and years and years of underperformance and then after all your blood, sweat and tears of conviction it has a couple of years of massively incredible returns and you feel vindicated only to rinse and repeat the above all over again.
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Re: Is it foolish to go all in Small Cap Value?

Post by onourway »

investyoumust wrote: Thu Jan 20, 2022 7:26 am
onourway wrote: Thu Jan 20, 2022 7:21 am I think you need to read this closely @investyoumust. SCV is no longer a secret - far from it. Therefore the rational response is that it will no longer outperform.

You really need to consider how you would feel if you'd been invested 100% in SCV over the past 5 years and weathered this kind of disparity. I consider myself an exceptionally detached long-term, passive investor, and I think it would eat me up every day once I realized what had (and was) happening. A huge part of what makes long-term, total market investing comparatively easy is that it prevents these kind of situations from happening. I never compare my returns to anything else because I know that there will always be individual stocks and sectors that temporarily outperform, but I also know that I own part of them and (as long as I keep my hands off) I will get the total market return.
Well, if there is a specific risk to small cap value that some people are rationally willing to avoid, it should continue to work even if it isn't a secret.

I think tracking error regret is real, but I can tell myself that I am still globally diversified across thousands of companies, so it is unlikely that they will all do terribly long-term.
This isn't tracking error regret (tracking error would be when Total Market does x, your Total Market fund does some fraction of x). If you own one of the major SCV funds, tracking error is likely to be insignificant and something you are unlikely to notice. What you will notice is all those days when all the news outlets are reporting markets have gone up, only to realize your holdings have gone down.

It's good that you are acknowledging the risk now as per @nisiprius' post. That excess risk means you could very well do much worse than owning a broader swath of the market. You have to be fully prepared for both outcomes.
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Re: Is it foolish to go all in Small Cap Value?

Post by JoMoney »

investyoumust wrote: Thu Jan 20, 2022 7:19 am
JoMoney wrote: Thu Jan 20, 2022 7:14 am Uh, sure. If the market is efficient, any wild assortment of stocks can be called efficient.
And if you like getting slapped in the face, you're free to conclude that doesn't cause "any harm (except accepting more slaps in the face)" either.
Well, historically you have been compensated for accepting these specific slaps in the face.
Not that I've seen. The ex ante data-mining of a strategy always looks good. The ex post results of real world funds trying to implement such strategies not so much. There were a few specific periods that looked better than others, but a portfolio of DFA's Small-Value fund DFSVX mostly has not reward it's holders for the additional slaps in the face.
A portfolio made up of the S&P 500 balanced with bonds (or instead leveraged up if you wanted more of it) to the same standard deviation of slaps-in-the-face was more rewarded than the equivalent in DFSVX.
PV Link

Similar type failures of strategy could have been pointed to for those chasing "high beta" or "small cap" portfolios in past paradigms as well.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
BitTooAggressive
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Re: Is it foolish to go all in Small Cap Value?

Post by BitTooAggressive »

investyoumust wrote: Thu Jan 20, 2022 7:23 am
BitTooAggressive wrote: Thu Jan 20, 2022 7:18 am Yes it’s foolish. I invest in Vanguard’s small cap value fund, but also small cap blend, total US market, total international, short term bonds,….

I would not advocate going all into any single investment class.
I think a case can be made that Small Cap Value should have higher expected returns than small blend, total market or short term bonds...
I agree with that. But returns of any single class are erratic except over long periods of time.

If it was not so who would need a savings account, CD. Just do everything out of you small cap value account or whatever else you go with.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 7:30 am To go 100% SCV you have to have an extremely emotionless, analytical, mechanical, robot-like brain which has no reaction to piling money into an asset that continually underperforms the broad market year after year after year after year after year after year after year after year after year after year... until, SCV gives you head fake with some decent returns and then goes back into dormancy and more years and years and years of underperformance and then after all your blood, sweat and tears of conviction it has a couple of years of massively incredible returns and you feel vindicated only to rinse and repeat the above all over again.
Great description.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

onourway wrote: Thu Jan 20, 2022 7:31 am
This isn't tracking error regret (tracking error would be when Total Market does x, your Total Market fund does some fraction of x). If you own one of the major SCV funds, tracking error is likely to be insignificant and something you are unlikely to notice. What you will notice is all those days when all the news outlets are reporting markets have gone up, only to realize your holdings have gone down.

It's good that you are acknowledging the risk now as per @nisiprius' post. That excess risk means you could very well do much worse than owning a broader swath of the market. You have to be fully prepared for both outcomes.
I mean tracking error regret in the sense that you are constantly comparing yourself to the S&P 500. Not that the fund is not following its index.

Of course I will do worse than the market for long periods of time. I think this is a feature, not a bug, of any risky investment strategy.
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Re: Is it foolish to go all in Small Cap Value?

Post by Escapevelocity »

A case can be made that in today's tech heavy economy, mega cap enterprises like Apple and Google hold huge and sustained economic advantages over smaller firms even those within tech. I hold small cap value but this concept would prevent me from going all in on it.
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Taylor Larimore
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Re: Is it foolish to go all in Small Cap Value?

Post by Taylor Larimore »

investyoumust wrote: Thu Jan 20, 2022 5:36 am What could go wrong going all in Small Cap Value?

By investing in Small Cap Value one is fully exposed to market beta anyways (actually slightly more market beta than the total stock market) plus the potential to harvest the additional small and value (and profitability) premiums.

Even if those premiums fail to realize in the future, it is hard to imagine that they should consistently produce a negative premium forever.

If one is able to take on the higher volatility of Small Cap Value, I think it is a pretty sensible decision that is likely to pay off.

Therefore, my portfolio would look something like this:
> 60-70% SPDR MSCI USA Small Cap Value Weighted
> 30-40% SPDR MSCI Europe Small Cap Value Weighted

This should be close to regional market cap weights and, if all the premiums were a fugazi after all, at least capture the global market risk premium.

What do you think?
investyoumust:

I think that it is a big mistake to invest everything in one small corner of the stock market. Experts agree:

Nobel Laureate, Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

What other experts say: viewtopic.php?f=10&t=156579

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market. Nobody does."
"Simplicity is the master key to financial success." -- Jack Bogle
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

JoMoney wrote: Thu Jan 20, 2022 7:32 am Not that I've seen. The ex ante data-mining of a strategy always looks good. The ex post results of real world funds trying to implement such strategies not so much. There were a few specific periods that looked better than others, but a portfolio of DFA's Small-Value fund DFSVX mostly has not reward it's holders for the additional slaps in the face.
A portfolio made up of the S&P 500 balanced with bonds (or instead leveraged up if you wanted more of it) to the same standard deviation of slaps-in-the-face was more rewarded than the equivalent in DFSVX.
PV Link

Similar type failures of strategy could have been pointed to for those chasing "high beta" or "small cap" portfolios in past paradigms as well.
I never said that Small Cap Value will produce better risk-adjusted returns (or even the same risk-adjusted returns). Not everybody has the ability and willingness to take on leverage, which is why riskier strategies generally have lower risk-adjusted returns in exchange for higher returns. (check stocks vs bonds).
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

BitTooAggressive wrote: Thu Jan 20, 2022 7:35 am I agree with that. But returns of any single class are erratic except over long periods of time.

If it was not so who would need a savings account, CD. Just do everything out of you small cap value account or whatever else you go with.
Sure. I would not replace my emergency fund with small cap value.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Escapevelocity wrote: Thu Jan 20, 2022 7:41 am A case can be made that in today's tech heavy economy, mega cap enterprises like Apple and Google hold huge and sustained economic advantages over smaller firms even those within tech. I hold small cap value but this concept would prevent me from going all in on it.
I don't believe this "this time is different" narrative.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Taylor Larimore wrote: Thu Jan 20, 2022 7:45 am investyoumust:

I think that it is a big mistake to invest everything in one small corner of the stock market. Experts agree:

Nobel Laureate, Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

What other experts say: viewtopic.php?f=10&t=156579

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market. Nobody does."
Gene Fama agrees that it is sensible to tilt to small cap value: https://youtu.be/dj-RO4mh-wA?t=2102
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jeffyscott
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Re: Is it foolish to go all in Small Cap Value?

Post by jeffyscott »

If, say, 50/50 SCV/bond is equivalent to 70/30 TSM/bond, then choosing the SCV portfolio seems sorta similar, but maybe reversed :?: , from a commonly held belief here that corporate bonds should be avoided and one should "take their risk on the equity side".

Is the OP essentially asking: "why not take your risk on the SCV side?".
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

jeffyscott wrote: Thu Jan 20, 2022 8:00 am Is the OP essentially asking: "why not take your risk on the SCV side?".
I am asking if there is something I'm overlooking that might cause Small Cap Value to durably underperform the market.
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Re: Is it foolish to go all in Small Cap Value?

Post by livesoft »

investyoumust wrote: Thu Jan 20, 2022 7:20 am
donaldfair71 wrote: Thu Jan 20, 2022 7:16 am
It isn’t timing them if you’re rebalancing. It’s rebalancing to control for risk, and some (klangfool comes to mind) have posted about doing it for rebalance bonus.
Sure, but it also lowers your factor exposure, which will lower your returns if small cap value does well.
You write that as if the factor exposure and/or risk is unchanging and the same all the time. The volatility is there for a reason or for more than one reason.
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Re: Is it foolish to go all in Small Cap Value?

Post by livesoft »

investyoumust wrote: Thu Jan 20, 2022 8:03 amI am asking if there is something I'm overlooking that might cause Small Cap Value to durably underperform the market.
Let me ask this question back at you: Has Small Cap Value in the past ever underperformed the market for more than 1-, 3-, 5-, 10- years?

If you are only going to "cash in" when it has not underperformed the market, then you are essentially market timing, are you not?
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

livesoft wrote: Thu Jan 20, 2022 8:05 am You write that as if the factor exposure and/or risk is unchanging and the same all the time. The volatility is there for a reason or for more than one reason.
No, risk (aversion) is surely different over time, but I don't believe I can improve my expected returns by adding just a market cap weighted fund for rebalancing purposes.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

livesoft wrote: Thu Jan 20, 2022 8:07 am Let me ask this question back at you: Has Small Cap Value in the past ever underperformed the market for more than 1-, 3-, 5-, 10- years?

If you are only going to "cash in" when it has not underperformed the market, then you are essentially market timing, are you not?
I'm not going to cash in until retirement presumably, irrespective of whether small cap value has underperformed or not.
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Re: Is it foolish to go all in Small Cap Value?

Post by Triple digit golfer »

Yes, it is foolish. It's a small part of the stock market. Why would you concentrate all of your holdings to a small part of the market?

All wealth creation in the U.S. market over 90 years ending in 2015 is attributable to just more than 1,000 stocks, while the remaining 24,000+ stocks collectively matched one-month Treasury bill returns.

No thanks. I'll own the market and be sure I capture the winners.

https://wpcarey.asu.edu/sites/default/f ... -bills.pdf

https://www.thinkadvisor.com/2017/08/21 ... 0020091136
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