Paul Merriman on small cap value tilt

[TOMO]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

[Call_Me_Op]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

I like Paul, but he has been arguing that forever. Nobody knows for sure. if you have a long time horizon and are OK with a large tracking error - including many years of under-performance - you may want to consider adding some SCV to your portfolio.

[steadyosmosis]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

I did SCV tilt for years.
Later discovered I didn't need it.
Not worth the hassle, so I simplified.
Less to worry about.

[Call_Me_Op]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

I did SCV tilt for years.
Later discovered I didn't need it.
Not worth the hassle, so I simplified.
Less to worry about.

Right. I think if I had it to do all over again, I would use maybe two funds (for my stocks)- total world market and a small amount in SCV just in case and as a diversifier.

[nisiprius]

I am admittedly a skeptic about small cap value. But in my opinion Paul Merriman is overenthusiastic and overconfident about it.

Consider what William J. Bernstein wrote in his just-out second edition of The Four Pillars of Investing:

In the long run, there’s nothing wrong with not tilting toward any factors at all—that is, owning only total-market funds. These incur virtually no investment costs and are highly tax efficient. Last, the only factor for which there’s both compelling supportive data and a believable theoretical and behavioral explanation is the value factor. I’m particularly impressed with the current high value spread. If forced to bet one way or another on the value factor, I’d go for a modest amount of exposure. But as with anything else in investing, at best you’re paid for taking risk, and that risk just might show up.

Compare that to Paul Merriman's overheated rhetoric. Bernstein is upfront about doubt and about risk. Merriman is free from doubt says almost nothing about the risk of small-cap value (in anything of his I've read).

And he has said that there is something wrong with owning only a total market fund. He has published columns with titles like "The one asset class every investor needs." In an article entitled Why Vanguard Total Stock Market isn’t the best fund in the fleet he has used language like:

My goal is to help investors take steps that are likely to increase their returns without taking undue risk. This is crucial: There is absolutely no evidence that owning the Total Stock Market Index Fund (TSMI) will accomplish that goal.

In fact, I think the opposite is true: Relying on this fund is likely to prevent investors from retiring when they otherwise could do so.

Frankly, I think that's fearmongering.

Here is a backtest of Paul Merriman's "Ultimate Buy-and-Hold Portfolio," which contains 30% US stocks, 30% international stocks, and 40% bonds, with a three-fund portfolio using the same percentage allocations to Total Stock, Total International, and Total Bond:

Source



Doubtless other time periods would have given other results--although the portfolio as stated couldn't have been implemented before the inception of the iShares MSCI EAFE Value ETF in 2006. But clearly you can do perfectly well without a small-cap value tilt.

[ivgrivchuck]

I have a medium SCV tilt, but I'm not at all sure that it will be pay off. In ~40 years I'll know... unless my days on Earth come to an end before that...

[calmaniac]

I am admittedly a skeptic about small cap value. But in my opinion Paul Merriman is overenthusiastic and overconfident about it.

I'm a small cap value investor, but I think Nisi's (& Bernstein's) comments are spot on.

We are overfunded in a manner it doesn't really matter much how we are invested. SCV is certainly nothing I would push for others to pursue. Particularly if their assets are at 25-30x of expenses.

[nedsaid]

I have fought in the factor threads around here for years. My conclusion is that there definitely was a Small Value premium but that you would have had to invest in it before 2002 to have experienced it. I didn't know about Fama/French, academic research, or Paul Merriman until 2007. I wish I had known about this in the late 1980's or early 1990's. I have been Value oriented throughout my investing career, sometimes Value worked well and sometimes not so well. They say the valuation gap between Growth and Value is again very high with Value stocks looking very cheap. We saw a big Small Value resurgence but Large Growth has roared back with a vengeance in 2023, particularly High Tech. I will maintain my tilts but I admit that my enthusiasm is flagging a bit. This might be a very good opportunity for Small Value, we will see.

[Nathan Drake]

I am admittedly a skeptic about small cap value. But in my opinion Paul Merriman is overenthusiastic and overconfident about it.

Consider what William J. Bernstein wrote in his just-out second edition of The Four Pillars of Investing:

In the long run, there’s nothing wrong with not tilting toward any factors at all—that is, owning only total-market funds. These incur virtually no investment costs and are highly tax efficient. Last, the only factor for which there’s both compelling supportive data and a believable theoretical and behavioral explanation is the value factor. I’m particularly impressed with the current high value spread. If forced to bet one way or another on the value factor, I’d go for a modest amount of exposure. But as with anything else in investing, at best you’re paid for taking risk, and that risk just might show up.

Compare that to Paul Merriman's overheated rhetoric. Bernstein is upfront about doubt and about risk. Merriman is free from doubt says almost nothing about the risk of small-cap value (in anything of his I've read).

And he has said that there is something wrong with owning only a total market fund. He has published columns with titles like "The one asset class every investor needs." In an article entitled Why Vanguard Total Stock Market isn’t the best fund in the fleet he has used language like:

My goal is to help investors take steps that are likely to increase their returns without taking undue risk. This is crucial: There is absolutely no evidence that owning the Total Stock Market Index Fund (TSMI) will accomplish that goal.

In fact, I think the opposite is true: Relying on this fund is likely to prevent investors from retiring when they otherwise could do so.

Frankly, I think that's fearmongering.

Here is a backtest of Paul Merriman's "Ultimate Buy-and-Hold Portfolio," which contains 30% US stocks, 30% international stocks, and 40% bonds, with a three-fund portfolio using the same percentage allocations to Total Stock, Total International, and Total Bond:

Source



Doubtless other time periods would have given other results--although the portfolio as stated couldn't have been implemented before the inception of the iShares MSCI EAFE Value ETF in 2006. But clearly you can do perfectly well without a small-cap value tilt.

Paul Merriman is simply saying you’re more likely to retire sooner by allocating to more risk factors. He’s also a big advocate of investing in SCV as soon as you can, preferably gifted at birth and letting it ride.

He’s not wrong. Over that kind of holding period, you’re more likely than not to have amassed significantly more with a factor based portfolio, allowing you to retire sooner than what a TSM fund would achieve.

[Gaston]

Paul Merriman is simply saying you’re more likely to retire sooner by allocating to more risk factors.

I agree with your summary of what Mr. Merriman is "simply saying". Where I struggle a bit is with the standard academic definition of risk, which tends to focus on price volatility. From this definition, any number of financial pundits assert that higher risk investments will, at some point, yield higher returns. I've never understood why this should be so.

In our daily lives, most of us seek to mitigate risk. For example, we look both ways before crossing a street. So why is it that in investing, taking on risk is deemed to automatically lead to higher, albeit more erratic, returns? Perhaps I'm just too conservative in my investment thinking, but to me, risk all too often implies a catastrophic loss of capital.

Can anyone explain why, in investing, risk tends to be touted as a one-way street to higher returns?

[muffins14]

Paul Merriman is simply saying you’re more likely to retire sooner by allocating to more risk factors.

I agree with your summary of what Mr. Merriman is "simply saying". Where I struggle a bit is with the standard academic definition of risk, which tends to focus on price volatility. From this definition, any number of financial pundits assert that higher risk investments will, at some point, yield higher returns. I've never understood why this should be so.

In our daily lives, most of us seek to mitigate risk. For example, we look both ways before crossing a street. So why is it that in investing, taking on risk is deemed to automatically lead to higher, albeit more erratic, returns? Perhaps I'm just too conservative in my investment thinking, but to me, risk all too often implies a catastrophic loss of capital.

Can anyone explain why, in investing, risk tends to be touted as a one-way street to higher returns?

Higher returns are expected, just not guaranteed.

It’s clear one should expect higher returns from stocks than cash, and that shows in the historical record. Over any short time period, that expectation may not manifest due to recession or some other cause, but the expectation was still there based on historical data.

if you do not expect stocks to perform better than cash, then the answer is that you should o or hold cash because you expect cash to have a higher return and zero volatility. Similar statements could be said about bonds, types of bonds, types of stocks, etc

[rkhusky]

Investing in a single stock is purported to be higher risk than a broad based index fund. So, why isn’t the expected return of a single stock higher than the index fund?

The usual explanation is that the risk of single stocks is uncompensated risk. How do we know that the risk in a small value fund will be compensated risk?

[CyclingDuo]

Paul Merriman is simply saying you’re more likely to retire sooner by allocating to more risk factors. He’s also a big advocate of investing in SCV as soon as you can, preferably gifted at birth and letting it ride.

He’s not wrong. Over that kind of holding period, you’re more likely than not to have amassed significantly more with a factor based portfolio, allowing you to retire sooner than what a TSM fund would achieve.

Say we started with $10K and just let it ride on two well known funds - Vanguard's S&P 500 vs. DFA's US Small Cap Value Fund (had to find a fund old enough to match my children's journey). I chose $10K because I could see a grandparent or parent perhaps making a lump sum birth gift to a grandchild or child to get the investing for the future started. We did that using UTMAs for our children.

Going with my bambino's journey (30 years and counting), results thus far for a lump sum would have been in favor of SCV...


https://www.portfoliovisualizer.com/bac ... XNM5N5CYS2

However, if we add say $1000 per year over the past 30 years (not an unlikely scenario at all to periodic invest), the delta between the two begins to narrow...


https://www.portfoliovisualizer.com/bac ... nW6zJDMoTV

...which leads us back to what I think was eloquently put into words by Jonathan Clements on his Humble Dollar Blog back in 2019. Here's what Jonathan said at the time...

"HERE’S A SOBERING thought: Much—and perhaps most—of the money you’ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn....

That brings us to a perverse conclusion—one I’m almost reluctant to mention: Because savings are so crucial, and because they’re the key driver of your ultimate nest egg, how you invest is somewhat less important." - Jonathan Clements
https://humbledollar.com/2019/09/show-me-the-money/

Now perhaps shoveling annual money into the two funds over the next 10, 20, 30, 40 years would indeed result in what you mention allowing you to retire sooner with SCV vs. TSM (or sub S&P 500). However, that remains to be seen - either with the lump sum or the periodic annual additions. That being said, our family focus is on the amount being saved (our household as well as our children's households) as the key driver with what it is invested in being the somewhat less important decision.

CyclingDuo

[Gaston]

Investing in a single stock is purported to be higher risk than a broad based index fund. So, why isn’t the expected return of a single stock higher than the index fund?

The usual explanation is that the risk of single stocks is uncompensated risk. How do we know that the risk in a small value fund will be compensated risk?

Yes, this is where it all gets a bit strange for me. Sometimes it seems like a definitional game. If a risky investment delivers, let's call it compensated risk. And if not, let's call it uncompensated risk. And, oh, let's assign the definition after-the-fact.

[KlangFool]

Folks,

I believe in SmallCapValue as one component of my portfolio construction.

It serves 2 functions.

A) It is a good counter weight to LargeCapGrowth when the stock market goes crazy regularly.

B) It is part of my Mini-Larry portfolio. 10% SmallCapValue with 10% Intermediate Term Treasury works very well together. They tend oscillate opposite to each other.

If you do not have a strategy and willingness to keep the same strategy for 10+ years or longer, do not invest in SmallCapValue.

In summary, I tilted to SmallCapValue not for higher return of SmallCapValue. I believe that it makes my portfolio risk adjusted return better.

KlangFool

[White Coat Investor]

The argument to invest in small value stocks over the total market is little different from the argument to invest in stocks over bonds.

I think there probably still is a premium in the long run, but I've clearly been wrong to have a SV tilt in my portfolio for the last couple of decades. So not sure you should listen to me.

I think the premium has two sources:

# 1 Behavioral- It's cooler to own the big names and easier to hold a portfolio similar to others
# 2 Risk - smaller companies and more valuey companies are riskier and thus should theoretically have higher returns

[Leesbro63]

For taxable accounts, how does the small cap value tilt compare with Vanguard Total Market from a tax-efficiency point of view?

[White Coat Investor]

For taxable accounts, how does the small cap value tilt compare with Vanguard Total Market from a tax-efficiency point of view?

It's less tax-efficient. You should put TSM in taxable before SV.

Still worth it even if your SV stocks must be in taxbale? I think so. The tax hit is less than I estimate the premium to be.

[KlangFool]

For taxable accounts, how does the small cap value tilt compare with Vanguard Total Market from a tax-efficiency point of view?

It's less tax-efficient. You should put TSM in taxable before SV.

Still worth it even if your SV stocks must be in taxbale? I think so. The tax hit is less than I estimate the premium to be.

A) I disagreed. SmallCapValue is so volatile that it provides a lot of "Tax Loss Harvest" and "Tax Gain Harvest" opportunity.

B) I have Total Market, Total International, and SmallCapValue in my taxable account.

KlangFool

[White Coat Investor]

For taxable accounts, how does the small cap value tilt compare with Vanguard Total Market from a tax-efficiency point of view?

It's less tax-efficient. You should put TSM in taxable before SV.

Still worth it even if your SV stocks must be in taxbale? I think so. The tax hit is less than I estimate the premium to be.

A) I disagreed. SmallCapValue is so volatile that it provides a lot of "Tax Loss Harvest" and "Tax Gain Harvest" opportunity.

B) I have Total Market, Total International, and SmallCapValue in my taxable account.

KlangFool

It's typically tax gain harvest OR tax loss harvest. Few people are in a situation where they will benefit from both. And for most people, tax loss harvesting suffers from the law of diminishing returns. The second $100,000 you harvest isn't anywhere near as useful as the first $100,000 and by the time you get to seven figures in losses you'd better have something really great planned to use them up. Sale of an expensive house. Sale of a business etc.

So I don't think volatility is really a great argument for something where a higher percentage of the return comes from yield. I'd still argue for TSM over SV to go into taxable first. But I can't be too big of a critic. Almost all my SV is in taxable too just because it's more tax efficient than what I've got in the retirement accounts.

[Nathan Drake]

Paul Merriman is simply saying you’re more likely to retire sooner by allocating to more risk factors. He’s also a big advocate of investing in SCV as soon as you can, preferably gifted at birth and letting it ride.

He’s not wrong. Over that kind of holding period, you’re more likely than not to have amassed significantly more with a factor based portfolio, allowing you to retire sooner than what a TSM fund would achieve.

Say we started with $10K and just let it ride on two well known funds - Vanguard's S&P 500 vs. DFA's US Small Cap Value Fund (had to find a fund old enough to match my children's journey). I chose $10K because I could see a grandparent or parent perhaps making a lump sum birth gift to a grandchild or child to get the investing for the future started. We did that using UTMAs for our children.

Going with my bambino's journey (30 years and counting), results thus far for a lump sum would have been in favor of SCV...


https://www.portfoliovisualizer.com/bac ... XNM5N5CYS2

However, if we add say $1000 per year over the past 30 years (not an unlikely scenario at all to periodic invest), the delta between the two begins to narrow...


https://www.portfoliovisualizer.com/bac ... nW6zJDMoTV

...which leads us back to what I think was eloquently put into words by Jonathan Clements on his Humble Dollar Blog back in 2019. Here's what Jonathan said at the time...

"HERE’S A SOBERING thought: Much—and perhaps most—of the money you’ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn....

That brings us to a perverse conclusion—one I’m almost reluctant to mention: Because savings are so crucial, and because they’re the key driver of your ultimate nest egg, how you invest is somewhat less important." - Jonathan Clements
https://humbledollar.com/2019/09/show-me-the-money/

Now perhaps shoveling annual money into the two funds over the next 10, 20, 30, 40 years would indeed result in what you mention allowing you to retire sooner with SCV vs. TSM (or sub S&P 500). However, that remains to be seen - either with the lump sum or the periodic annual additions. That being said, our family focus is on the amount being saved (our household as well as our children's households) as the key driver with what it is invested in being the somewhat less important decision.

CyclingDuo

Shouldn’t come as a surprise. The last 16+ years hasn’t been great for the value premium. But it goes through those periods 20% of the time

Still, it hasn’t cost you anything other than the headache of additional volatility. You still had a good outcome. The 20% just showed up with DCA instead of the 80%

[KlangFool]

For taxable accounts, how does the small cap value tilt compare with Vanguard Total Market from a tax-efficiency point of view?

It's less tax-efficient. You should put TSM in taxable before SV.

Still worth it even if your SV stocks must be in taxbale? I think so. The tax hit is less than I estimate the premium to be.

A) I disagreed. SmallCapValue is so volatile that it provides a lot of "Tax Loss Harvest" and "Tax Gain Harvest" opportunity.

B) I have Total Market, Total International, and SmallCapValue in my taxable account.

KlangFool

It's typically tax gain harvest OR tax loss harvest. Few people are in a situation where they will benefit from both.

White Coat Investor,

Personal finance is personal.

A) At my marginal tax rate, the long term capital gain rate is 0%.

B) If I "Tax Loss Harvest" up to $3,000 with no offsetting capital gain, it deducts my ordinary income tax at 20+% rate.

C) If I "Tax Gain Harvest", it is at 0%.

D) I have been unemployed for more than 1 year a few times. So, my income was not stable and continuous from year to year.

KlangFool

[Lastrun]

....

I chose $10K because I could see a grandparent or parent perhaps making a lump sum birth gift to a grandchild or child to get the investing for the future started.

.....

Going with my bambino's journey (30 years and counting), results thus far for a lump sum would have been in favor of SCV...

......

Now perhaps shoveling annual money into the two funds over the next 10, 20, 30, 40 years would indeed result in what you mention allowing you to retire sooner with SCV vs. TSM (or sub S&P 500). However, that remains to be seen - either with the lump sum or the periodic annual additions. That being said, our family focus is on the amount being saved (our household as well as our children's households) as the key driver with what it is invested in being the somewhat less important decision.

CyclingDuo

I think your post brings up an important point, and I did not want to repost the whole thing. I have always felt that, for steady yearly accumulators, a small cap value tilt would not make much of a difference. At least based on historical data. However, for a lump sum investor, it does and your Portfolio Visualizer charts show this.

Vineviz posted a couple years back and the essence of the post (which I cannot find) is that a factor tilt may be more important to the retiree, and had the charts to illustrate it. This would argue against Merriman's two-funds for life which ramps down the SCV tilt as one ages.

Clement's reminder is a good one on the BH's mantra that how much you save and your stock bond allocation will largely drive your ultimate numbers.

[Random Musings]

I believe there is a small cap value premium in the long run, at a price of higher volatility. However, how well one can capture it (not return %, but in net worth) comes down to the sequence of returns over one's investment horizon.

RM

[Glockenspiel]

I believe in the theory of why small-cap value companies should have a higher return in the long run, and have maintained 10-15% of my portfolio in it for the past 6-8 years.

It has not paid off thus far, but it doesn't make sense to get out of it, so I'll just keep it forever for more diversification and ability to re-balance.

[rkhusky]

B) It is part of my Mini-Larry portfolio. 10% SmallCapValue with 10% Intermediate Term Treasury works very well together. They tend oscillate opposite to each other.

SCV and Int Treasury have had a -0.19 correlation over the last 25 years. Not much oscillating against each other.

[KlangFool]

B) It is part of my Mini-Larry portfolio. 10% SmallCapValue with 10% Intermediate Term Treasury works very well together. They tend oscillate opposite to each other.

SCV and Int Treasury have had a -0.19 correlation over the last 25 years. Not much oscillating against each other.

If you believe that, don't invest in SmallCapValue.

KlangFool

[abc132]

Small Cap Value definitely has a premium - you keep paying it.

More seriously, now is as good a time as any to add SCV to your portfolio if that is part of your plan. You don't need an overall SCV premium if you are buying now. You may benefit while the long term holders still lose.

I am 3% SCV and wouldn't mind getting up to 10% by retirement. I'm busy buying fixed income and international so this may not happen.

[White Coat Investor]

For taxable accounts, how does the small cap value tilt compare with Vanguard Total Market from a tax-efficiency point of view?

It's less tax-efficient. You should put TSM in taxable before SV.

Still worth it even if your SV stocks must be in taxbale? I think so. The tax hit is less than I estimate the premium to be.

A) I disagreed. SmallCapValue is so volatile that it provides a lot of "Tax Loss Harvest" and "Tax Gain Harvest" opportunity.

B) I have Total Market, Total International, and SmallCapValue in my taxable account.

KlangFool

It's typically tax gain harvest OR tax loss harvest. Few people are in a situation where they will benefit from both.

White Coat Investor,

Personal finance is personal.

A) At my marginal tax rate, the long term capital gain rate is 0%.

B) If I "Tax Loss Harvest" up to $3,000 with no offsetting capital gain, it deducts my ordinary income tax at 20+% rate.

C) If I "Tax Gain Harvest", it is at 0%.

D) I have been unemployed for more than 1 year a few times. So, my income was not stable and continuous from year to year.

KlangFool

Still, it seems that all the tax gain you may do in a given year will offset all the tax loss harvesting you do (and use up any carried over losses. It seems to me that tax gain harvesting is done by young relatively poor people mostly and then as they build wealth, they shift into tax loss harvesting. Are you really going back and forth year to year?

[KlangFool]

Still, it seems that all the tax gain you may do in a given year will offset all the tax loss harvesting you do (and use up any carried over losses. It seems to me that tax gain harvesting is done by young relatively poor people mostly and then as they build wealth, they shift into tax loss harvesting. Are you really going back and forth year to year?

White Coat Investor,

When someone was unemployed for more than 1 year a few times, the income will be low in some years.

KlangFool

[GP813]

AVUV has lagged VTI all year but it's up 5% in one day(today) due to the inflation report and it's still really cheap. Merriman does always say if you believe in the small cap value premium you have to hold for long periods of time and underperformance.

[Nathan Drake]

SCV Heads Rejoicing Today

[biscuit5]

my SCV ETF went up over 5% today

[BitTooAggressive]

Investing in a single stock is purported to be higher risk than a broad based index fund. So, why isn’t the expected return of a single stock higher than the index fund?

The usual explanation is that the risk of single stocks is uncompensated risk. How do we know that the risk in a small value fund will be compensated risk?

All of the theory applies to diversified portfolios.

On a single stock your question makes no sense. Why is it not expected to be lower? A single stock will be whatever it is and if chosen at random the average would be the guess if stock returns had a normal distribution but they historically don’t. Only 1 in 25 stocks account for outperformance over tbills.

[cmr86]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

This is Paul Merriman's whole schtick. And the answer is...maybe?

[CyclingDuo]

....

I chose $10K because I could see a grandparent or parent perhaps making a lump sum birth gift to a grandchild or child to get the investing for the future started.

.....

Going with my bambino's journey (30 years and counting), results thus far for a lump sum would have been in favor of SCV...

......

Now perhaps shoveling annual money into the two funds over the next 10, 20, 30, 40 years would indeed result in what you mention allowing you to retire sooner with SCV vs. TSM (or sub S&P 500). However, that remains to be seen - either with the lump sum or the periodic annual additions. That being said, our family focus is on the amount being saved (our household as well as our children's households) as the key driver with what it is invested in being the somewhat less important decision.

CyclingDuo

I think your post brings up an important point, and I did not want to repost the whole thing. I have always felt that, for steady yearly accumulators, a small cap value tilt would not make much of a difference. At least based on historical data. However, for a lump sum investor, it does and your Portfolio Visualizer charts show this.

Vineviz posted a couple years back and the essence of the post (which I cannot find) is that a factor tilt may be more important to the retiree, and had the charts to illustrate it. This would argue against Merriman's two-funds for life which ramps down the SCV tilt as one ages.

Clement's reminder is a good one on the BH's mantra that how much you save and your stock bond allocation will largely drive your ultimate numbers.

At least with my example - thinking about a lump sum investment for a child that is just born compared to periodic investing over the years - I wonder how many parents have enough money sitting around to be able to lump sum a big enough chunk into SCV at or near the birth of their children that will make a difference? The premise sounds good, but the application of it may be out of the realm of the majority of young parents at that stage of their life to throw a big lump sum at SCV in an account for their child. Most are still saddled with student loan debt, buying homes or saving to buy homes, starting out in their careers, etc. So the lump sum may remain the mythical tale it appears to be for most.

CyclingDuo

[Call_Me_Op]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

This is Paul Merriman's whole schtick. And the answer is...maybe?

That should not be surprising, as there are no guarantees with investing. And if there is an SCV premium, it comes with s proportional increase in risk.

[invest2bfree]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

Makes no sense.

Small cap value universe is so small that if every one tilts then it will no longer be a tilt.

[Call_Me_Op]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

Makes no sense.

Small cap value universe is so small that if every one tilts then it will no longer be a tilt.

Sure there will - even though that will never happen. There is always a small-cap universe - the smallest X% in terms of market cap.

[KlangFool]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

Makes no sense.

Small cap value universe is so small that if every one tilts then it will no longer be a tilt.

Human behavior will make sure that it will not happen....

What will most likely recur many time is everyone pour into large cap growth like now...

KlangFool

[abc132]

I'm not a believer that there has to be some future premium, but 10% of my stocks are SCV and 5% are MCV.

These are just diversifiers because SCV can move quickly and as this year has shown SCV does not have to align with TSM.

I don't see a big reason to need both TSM and SCV until you are within 10 years of retirement, and one approach is adding a few percent SCV each year as you add a few bond percent each year throughout the decade before retirement.

Notably
- I don't care which outperforms in the long run
- I'm not looking for meaningful tax loss harvesting gains
- My decision is independent of the outcome

There is not much room for behavioral error in those remarks.

[rocket354]

In this linked podcast: https://player.fm/series/sound-investin ... bogleheads , Merriman argues that a small value tilt is still worthwhile. Comments?

Makes no sense.

Small cap value universe is so small that if every one tilts then it will no longer be a tilt.

Sure there will - even though that will never happen. There is always a small-cap universe - the smallest X% in terms of market cap.

Which brings up a good point as to why the SCV premium could have (not necessarily has) gone away. If the great data scientists and super-computers of fintech all looking for an edge have identified the specific advantageous elements of the companies that were previously classified as SCV--the ones that actually drove the historical SCV outperformance--then those were now bid up to the point they are no longer SCV. But these categorical definitions are all relative. So now another set of companies, ones with a different profile, even if only slightly, are now all that's left of SCV, and those are the ones that we might not expect to see outperformance. Plausible, but is it reality? Let's check back in...oh, 40 years.

[rkhusky]

Investing in a single stock is purported to be higher risk than a broad based index fund. So, why isn’t the expected return of a single stock higher than the index fund?

The usual explanation is that the risk of single stocks is uncompensated risk. How do we know that the risk in a small value fund will be compensated risk?

All of the theory applies to diversified portfolios.

On a single stock your question makes no sense. Why is it not expected to be lower? A single stock will be whatever it is and if chosen at random the average would be the guess if stock returns had a normal distribution but they historically don’t. Only 1 in 25 stocks account for outperformance over tbills.

Higher risk = higher return. The argument for SCV is that it is expected to have higher return because it is higher risk. Why doesn’t that apply to single stocks?

If the reason is diversification, is SCV diversified?
If the reason is compensated risk, will SCV risk be compensated?

[BitTooAggressive]

Investing in a single stock is purported to be higher risk than a broad based index fund. So, why isn’t the expected return of a single stock higher than the index fund?

The usual explanation is that the risk of single stocks is uncompensated risk. How do we know that the risk in a small value fund will be compensated risk?

All of the theory applies to diversified portfolios.

On a single stock your question makes no sense. Why is it not expected to be lower? A single stock will be whatever it is and if chosen at random the average would be the guess if stock returns had a normal distribution but they historically don’t. Only 1 in 25 stocks account for outperformance over tbills.

Higher risk = higher return. The argument for SCV is that it is expected to have higher return because it is higher risk. Why doesn’t that apply to single stocks?

If the reason is diversification, is SCV diversified?
If the reason is compensated risk, will SCV risk be compensated?

Single stocks will just be dominated by how that one company performs…. The returns of individual stocks is not a normalized return around a mean value but contains a few stocks that cause the market to return more than the risk free rate.

Also keep in mind EXPECTED RETURN is not the same as RETURN. Those that bought ENRON had a higher expected return than zero but got zero.

Think of a single stock like a single lottery ticket with a single jackpot and some other decent payouts. Maybe you expect to lose 40 cents on every dollar you buy but the actual results are extremely skewed to the few winners. The stock market is a little like that but not as extreme. But you need to have a well diversified portfolio to start mining premiums even to get the expected market premium.

Edit: if I bought 1 or 2 stocks out of SP500 I would not expect to get SP500 like returns. I could vary wildly because of just two stocks. Now if I bought 300 random companies from SP500 and cap weighted them I suspect I would come close to SP500 returns.

[trugs]

CyclingDuo,

"HERE’S A SOBERING thought: Much—and perhaps most—of the money you’ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn...."

Note that in both of your examples, contrary to this quote, the final balance is almost all investments returns, not the raw dollars you socked away.

Note also that the risk adjusted return, Sharpe or Sortino, is worse for SCV. Meaning that for a given level of risk, you could have more total stock a fewer bonds, leading to a higher return for total stock.

[Nathan Drake]

CyclingDuo,

"HERE’S A SOBERING thought: Much—and perhaps most—of the money you’ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn...."

Note that in both of your examples, contrary to this quote, the final balance is almost all investments returns, not the raw dollars you socked away.

Note also that the risk adjusted return, Sharpe or Sortino, is worse for SCV. Meaning that for a given level of risk, you could have more total stock a fewer bonds, leading to a higher return for total stock.

Sharpe ratio is highly sensitive to start/end dates.

There’s also a diversification argument for holding more risk factors rather than increasing concentration of a single one

[trugs]

Total stock holds every risk factor (in the US stock market). Please show data on how overweighting SCV reduces risk.

[TipsQuestions]

Does he or his company happen to sell these funds for a living?

[Cruncher]

I wish I had more time to peruse these forums.

Nispris nailed the OP question.

I too have left all tilting. Just much easier to 30/30/40 (or whatever AA) split the investable world and have done with it. Time is too precious to waste on chasing "extra" returns.

[Nathan Drake]

Total stock holds every risk factor (in the US stock market). Please show data on how overweighting SCV reduces risk.

No, it does not.

It only holds the Equity Market Risk factor of the US market.

There are many other types of risk factors, including within bonds and fixed income.

Overweighting SCV doesn't reduce risk, it compliments the profile of risk because it does not perform the same as the US TSM, while experiencing long term high returns. Both qualities are valuable and help optimize the portfolio.