Factoring in value as a strategy

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Jeresoph
Posts: 33
Joined: Sun Dec 11, 2016 6:57 pm

Factoring in value as a strategy

Post by Jeresoph » Tue Dec 05, 2017 9:38 am

My retirement funds are allocated into 3 funds (thx Bogleheads) VTI, VXUS and AGG. They are split 60:40 stocks to bonds and within stocks 45% domestic (VTI) and 15% Intl (VXUS)
I’m aware that VTI covers the range of US stocks but what do people think about increasing additional representation in value funds and whether they should be large cap value or small cap value. I’m still learning so not getting too technical will be a blessing. Thanks so much for your help.

Chip
Posts: 1646
Joined: Wed Feb 21, 2007 4:57 am

Re: Factoring in value as a strategy

Post by Chip » Tue Dec 05, 2017 10:11 am

That subject has had literally tens of thousands of posts here.

There are many who firmly believe that a well-designed factor-based strategy ("value" is a factor, "small" is another) is a better way to approach portfolio construction. There are also many who believe that factors are either the result of data mining or are so well known that they won't produce the returns seen in the past. There are others who think maybe the factor stuff is real but not worth the complexity. The arguments continue.

You appear to have an extremely low cost portfolio with some exposure to international. You don't need to change it unless you have a burning desire to do so. I would recommend reading the wiki and a bunch of books before even thinking about going in that direction.

FWIW, I tilt towards value via a small cap value fund, a mid cap value fund and an international value fund. But please don't ask me to justify my choices. :D

dbr
Posts: 24136
Joined: Sun Mar 04, 2007 9:50 am

Re: Factoring in value as a strategy

Post by dbr » Tue Dec 05, 2017 10:24 am

You can't discuss factor investing without getting technical. Larry Swedroe does have a book on the subject which might be worth reading.

My personal opinion is that tilting to size, value, or other factors is something to do only when you don't have to ask if you should. That is intended as a seriously helpful remark and not as a put-down. The actual data once surveyed on this forum is that more than half of respondents claimed at the time that they tilt to small and value factors. I personally do not.

retiredjg
Posts: 30805
Joined: Thu Jan 10, 2008 12:56 pm

Re: Factoring in value as a strategy

Post by retiredjg » Tue Dec 05, 2017 10:39 am

There is evidence that small cap and value have had an added benefit in the past. Some people think it will continue. Others think it will not. Of the people who think it might continue, there is some thought it may take a very long time (decades) to see any benefit.

Of course, none of us know. What probably is agreed on is that even if there is a benefit, it is not going to make or break your portfolio. It's just some sprinkles on the icing of your cake.

I agree with dbr - this is something to do or not do if you already have an opinion on what will happen. If you need to ask, it may be better to not venture out in that direction.

Jeresoph
Posts: 33
Joined: Sun Dec 11, 2016 6:57 pm

Re: Factoring in value as a strategy

Post by Jeresoph » Tue Dec 05, 2017 11:10 pm

retiredjg wrote:
Tue Dec 05, 2017 10:39 am
There is evidence that small cap and value have had an added benefit in the past. Some people think it will continue. Others think it will not. Of the people who think it might continue, there is some thought it may take a very long time (decades) to see any benefit.

Of course, none of us know. What probably is agreed on is that even if there is a benefit, it is not going to make or break your portfolio. It's just some sprinkles on the icing of your cake.

I agree with dbr - this is something to do or not do if you already have an opinion on what will happen. If you need to ask, it may be better to not venture out in that direction.

Wise words and much appreciated.

Jeresoph
Posts: 33
Joined: Sun Dec 11, 2016 6:57 pm

Re: Factoring in value as a strategy

Post by Jeresoph » Tue Dec 05, 2017 11:13 pm

dbr wrote:
Tue Dec 05, 2017 10:24 am
You can't discuss factor investing without getting technical. Larry Swedroe does have a book on the subject which might be worth reading.

My personal opinion is that tilting to size, value, or other factors is something to do only when you don't have to ask if you should. That is intended as a seriously helpful remark and not as a put-down. The actual data once surveyed on this forum is that more than half of respondents claimed at the time that they tilt to small and value factors. I personally do not.
Taken that right way and Inappreciate your reality check.
At this stage I will not get ahead of myself till I understand more
and can own my decisions. Thanks again.

Theoretical
Posts: 1096
Joined: Tue Aug 19, 2014 10:09 pm

Re: Factoring in value as a strategy

Post by Theoretical » Wed Dec 06, 2017 1:27 am

As a heavy tilter (all Value with lots of small),
My personal opinion is that tilting to size, value, or other factors is something to do only when you don't have to ask if you should. That is intended as a seriously helpful remark and not as a put-down. The actual data once surveyed on this forum is that more than half of respondents claimed at the time that they tilt to small and value factors. I personally do not.
I wholeheartedly agree with this statement.

Something else to consider is that Value tilting is a lot like leverage in its effect on standard deviations. Using Portfolio Visualizer and the Simba spreadsheet (data limits acknowledged), a 50/50 large value/Small Value tilt Portfolio like Robert T's is about equivalent to 1.33x the volatility of an equivalent amount of TSM. For the all-small value Larry Portfolio Equity slice, it functions a lot like 1.5x leverage. Tilting increases risk (especially behavioral), especially if you don't match the tilt to a more divergent asset category like treasury bonds as opposed to corporate bonds.

Caduceus
Posts: 1485
Joined: Mon Sep 17, 2012 1:47 am

Re: Factoring in value as a strategy

Post by Caduceus » Wed Dec 06, 2017 5:47 am

You should definitely tilt to value. Go check out EGO (Eldorado Gold Corp), which is trading at 23% of book value, and I think recently earned something like 0.01 per share. Doesn't get more deep value than that. Who cares if its mines are operational? Or that the last time it sold some of its gold assets it took a massive writedown on its accounting value? Or that in the last decade it has systematically destroyed shareholder equity at an alarming rate through inept management. This is a classic value stock if you just look at the numbers - I dare you to find something more "value-y" than this.

Clearly everyone should tilt to value stocks like these. Great idea.

User avatar
Earl Lemongrab
Posts: 3113
Joined: Tue Jun 10, 2014 1:14 am

Re: Factoring in value as a strategy

Post by Earl Lemongrab » Wed Dec 06, 2017 1:13 pm

^^ I don't understand this point. Are you saying that if some potential value stock is probably a bad investment, all are? Is this stock found in the common small value indexes? If not, then what is the relevance?

Every year, companies contained in various indexes that Bogleheads use go bankrupt. Should Bogleheads avoid those indexes? If not, then what is your point?
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

BigJohn
Posts: 1418
Joined: Wed Apr 02, 2014 11:27 pm

Re: Factoring in value as a strategy

Post by BigJohn » Wed Dec 06, 2017 6:51 pm

I don't tilt but lots of people here do. I agree with comments above that you really need to understand and believe in the tilts before you invest. Even proponents of tilts will tell you that you need to be prepared for years (sometimes many years) of under performance while waiting for the benefits. If you are not enough of a believer to stay the course through the bad times, you'll sell when its low and almost certainly do worse than a no tilt strategy.

MotoTrojan
Posts: 861
Joined: Wed Feb 01, 2017 8:39 pm

Re: Factoring in value as a strategy

Post by MotoTrojan » Wed Dec 06, 2017 11:40 pm

dbr wrote:
Tue Dec 05, 2017 10:24 am

My personal opinion is that tilting to size, value, or other factors is something to do only when you don't have to ask if you should. That is intended as a seriously helpful remark and not as a put-down. The actual data once surveyed on this forum is that more than half of respondents claimed at the time that they tilt to small and value factors. I personally do not.
To further this point. I'd say it is less about truly understanding factors so you can set things up, and more about knowing enough (and thus having enough faith) to let things ride for decades in order to gain the benefit. You may have many years of underperforming VTI.

I'm 100% and FWIW have 55% VTI, 25% VXUS, 20% VIOV (small-cap value). Value historically was best in small-caps, and in general I wanted to tilt small.

VIOV is smaller than VBR, fyi.

Apologies for the echo :) I just saw some recent posts had a similar point.

Post Reply