Paul Merriman and Small Cap Value

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GridironGems
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Paul Merriman and Small Cap Value

Post by GridironGems »

Paul Merriman has been talking a lot about small cap value recently including in his new target date funds and had a podcast just on the small cap value subject. He obviously loves this asset class and recommends it over the total stock market. His new target date funds has the majority of it in small cap value. I don't think people here are too fond of small cap value and would only consider a small percentage of it, if at all. Just found it interesting how Paul Merriman keeps talking it up
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Re: Paul Merriman and Small Cap Value

Post by whodidntante »

He sees strong evidence in favor of small cap value and he advocates low cost passive investments that capture those factor premia (small and value).
Last edited by whodidntante on Sun Dec 17, 2017 5:41 pm, edited 1 time in total.
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nedsaid
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Re: Paul Merriman and Small Cap Value

Post by nedsaid »

I do tilt my portfolio but I am not an advocate of extreme tilting. How much of a good thing is too much? Hard to say, there are all kinds of opinions out there. I will say that I don't advocate such things as the "Larry portfolio" where the entire stock allocation is in Small Cap Value stocks. Large Cap stocks and Small Cap stocks take turns outperforming each other, right now we are in a Large Growth market. These trends can last a long time, sometimes a decade or more. That is a long time to wait, hoping for the market to turn.
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Re: Paul Merriman and Small Cap Value

Post by venkman »

I was playing around with PV, testing TSM vs. SCV. (Numbers include 2017, up through November.)

Since 1995, SCV has outperformed TSM by an average of 1.53% per year. There was never a stretch where TSM outperformed SCV for more than 2 consecutive calendar years. SCV beat TSM in 15 out of the 23 years (including TSM's win this year).

SCV beat TSM seven years in a row, from 2000-2006. Since 2007, TSM has beaten SCV an average of 0.12% per year. If that's an extended "losing streak" for SCV, I would happily live with it, in exchange for the higher returns during the winning streaks.

Obviously, TSM and SCV are going to be a lot closer on a risk-adjusted basis, but the type of people who tend to tilt toward SCV generally understand and are okay with the added risk.

What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
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Re: Paul Merriman and Small Cap Value

Post by peterinjapan »

Thanks for the info, Venkman. Do you or anyone have a favorite way to play SCV? I guess I'll look at iShares IJS since I'm an iShares kind of guy.
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Re: Paul Merriman and Small Cap Value

Post by NYCwriter »

I like Merriman's ideas but I've avoided the complexity of his approach with my core portfolio. In addition to my basic core funds I hold VB and Vanguard's Strategy Equity (Small/Mid cap) Mutual fund. My VB holding is a supplement to Total Stock Index and to my long-term individual equities, which skew larger cap and which I've had to reduce (Apple, Amazon, Google, for example) because of market cap weight.

Is there a valid reason to go to small value rather than the combined Small Cap index?
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Re: Paul Merriman and Small Cap Value

Post by privatefarmer »

NYCwriter wrote: Sun Dec 17, 2017 9:56 pm I like Merriman's ideas but I've avoided the complexity of his approach with my core portfolio. In addition to my basic core funds I hold VB and Vanguard's Strategy Equity (Small/Mid cap) Mutual fund. My VB holding is a supplement to Total Stock Index and to my long-term individual equities, which skew larger cap and which I've had to reduce (Apple, Amazon, Google, for example) because of market cap weight.

Is there a valid reason to go to small value rather than the combined Small Cap index?
Even if all you owned was a small value fund, it likely would be roughly split between small value and small blend as the funds are not 100% "pure" SCV. I own DFSVX for example and it has a large percentage in small blend.
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Re: Paul Merriman and Small Cap Value

Post by Call_Me_Op »

GridironGems wrote: Sun Dec 17, 2017 5:32 pm Paul Merriman has been talking a lot about small cap value recently including in his new target date funds and had a podcast just on the small cap value subject. He obviously loves this asset class and recommends it over the total stock market. His new target date funds has the majority of it in small cap value. I don't think people here are too fond of small cap value and would only consider a small percentage of it, if at all. Just found it interesting how Paul Merriman keeps talking it up
It's not just recently - Paul has been talking about SCV for years. His fondness of this "asset class" stems from its long-term historical performance.
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Re: Paul Merriman and Small Cap Value

Post by rkhusky »

venkman wrote: Sun Dec 17, 2017 8:41 pm What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
The structural difference between stocks and bonds is substantially greater than the difference between TSM and and it's subset of stocks characterized by small size and high book to market. The market premium has historically been much greater than the value premium and investing in the market has been cheaper than investing in value, providing slack in down times.
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Re: Paul Merriman and Small Cap Value

Post by Call_Me_Op »

rkhusky wrote: Mon Dec 18, 2017 7:22 am
venkman wrote: Sun Dec 17, 2017 8:41 pm What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
The structural difference between stocks and bonds is substantially greater than the difference between TSM and and it's subset of stocks characterized by small size and high book to market. The market premium has historically been much greater than the value premium and investing in the market has been cheaper than investing in value, providing slack in down times.
Nonetheless, Venkman has a point. People seem to have no trouble accepting that stocks are likey to outperform bonds because they are riskier. Well, small value stocks are riskier than large stocks. Why would we not expect a premium?
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Re: Paul Merriman and Small Cap Value

Post by livesoft »

GridironGems wrote: Sun Dec 17, 2017 5:32 pm I don't think people here are too fond of small cap value and would only consider a small percentage of it, if at all. Just found it interesting how Paul Merriman keeps talking it up
Merriman has been talking it up for more than 30 years I think. LOTS of Bogleheads are quite fond of small cap value, so I am not sure why you got the impression you have. Previous polls on the forum show many many many people on the forum tilt to small cap and value.

Here a thread to read: viewtopic.php?t=96441
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rkhusky
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Re: Paul Merriman and Small Cap Value

Post by rkhusky »

Call_Me_Op wrote: Mon Dec 18, 2017 7:27 am
rkhusky wrote: Mon Dec 18, 2017 7:22 am
venkman wrote: Sun Dec 17, 2017 8:41 pm What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
The structural difference between stocks and bonds is substantially greater than the difference between TSM and and it's subset of stocks characterized by small size and high book to market. The market premium has historically been much greater than the value premium and investing in the market has been cheaper than investing in value, providing slack in down times.
Nonetheless, Venkman has a point. People seem to have no trouble accepting that stocks are likey to outperform bonds because they are riskier. Well, small value stocks are riskier than large stocks. Why would we not expect a premium?
I would hope that investors are demanding a premium for investing in small value. But if small value investing becomes the next hot thing (or is the next hot thing), perhaps investors won't do their due diligence and will stop demanding the premium. Can I trust the market to price the long term risk of small value? Is the market as good at pricing small value versus TSM, versus the market pricing bonds versus TSM, given the much smaller margin for error in pricing small value versus pricing bonds?

Even if there is a premium, is it sufficient to compensate for the small value risk for every investor? For example, perhaps the premium will be too inconsistent for individuals who only have a 20 year investing horizon, but fine for an endowment with a 100+ year horizon.
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Re: Paul Merriman and Small Cap Value

Post by MikeMak27 »

IJS is probably the best way to get exposure to small value. While it’s expense ratio is higher than others, they do enough share lending to make up for it. It also has the most liquidity. STAY AWAY from the Russell indices as they underperform significantly.

About 95% of my domestic equity allocation is in small value. As others have pointed out it’s performance is robust over any medium or long term period. In the depths of the financial crisis, small value didn’t perform any worse than large blend. I notice on a day to day basis that small value is more volatile, but the swings end up evening out over a long period of time. If you have quite some time before retirement, I think small value is the way to go.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)
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Re: Paul Merriman and Small Cap Value

Post by 2pedals »

I am nearing retirement with an AA of 40% stocks and 60% bonds and see no need for SCV specific risk in my portfolio. After I understand what my new life in retirement will be like, I then may add more risk and change my AA to 50/50 or something like that using the three-fund portfolio.
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Re: Paul Merriman and Small Cap Value

Post by bertilak »

venkman wrote: Sun Dec 17, 2017 8:41 pm What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
If the the SVC premium is due to risk, then why is SCV the best way to take on the risk? Seems simpler to adjust your stock vs bond allocation. That also seems preferable because, I think, the difference between stock and bond risk is :
  • more stable and therefore predictable then the risk along the sliding scales of the size an value spectrums.
  • more distinct (wider) because the risk comes from completely different sources: A stock is risky because your returns are a share of a company's business success, which is uncertain, but bonds are contractual in nature and also take precedence if a company goes into bankruptcy protection.
Apples and oranges instead of varieties of apples.

IF size/value risk gets more return for the same amount of risk (risk-adjusted return) then there is a real reason to go for it. The case for that seems less certain then simply "more risk equals more return." I don't discount the possibility of better risk-adjusted return for SCV, I am simply not energetic enough to follow the arguments so would need a simpler explanation. I guess one needs to allocate one's time and brainpower to the most likely return on THAT investment!
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Re: Paul Merriman and Small Cap Value

Post by jimmyrules712 »

venkman wrote: Sun Dec 17, 2017 8:41 pm I was playing around with PV, testing TSM vs. SCV. (Numbers include 2017, up through November.)

Since 1995, SCV has outperformed TSM by an average of 1.53% per year. There was never a stretch where TSM outperformed SCV for more than 2 consecutive calendar years. SCV beat TSM in 15 out of the 23 years (including TSM's win this year).

SCV beat TSM seven years in a row, from 2000-2006. Since 2007, TSM has beaten SCV an average of 0.12% per year. If that's an extended "losing streak" for SCV, I would happily live with it, in exchange for the higher returns during the winning streaks.

Obviously, TSM and SCV are going to be a lot closer on a risk-adjusted basis, but the type of people who tend to tilt toward SCV generally understand and are okay with the added risk.

What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
Was this testing done using real life ETF or mutual funds or just a theoretical basket of stocks? My concerns over SCV tilting are whether or not I can trust something like Vanguards Small Cap value mutual fund to really capture that premium. I know SCV outperforms in theory.

Comparing VSIAX to VTSAX it looks like over the last 1 year total market is up 17.76% with Small value up 6.76%. Over 5 years Total is up 91.07% and small value 85.32%. If I go back to 2011, which is when the small value fund was created, it looks like total market is up 133.43% and small value is up 134.41%. I guess maybe that confirms that over the long run small value may get you some extra performance but I'm not sure 1% total over 6 years is enough to convince me it's worth it.

Ultimately what I keep coming back to is if there's a sure fire magical way to outperform the market by slicing or tilting, then wouldn't every MF manager out there doing the same thing, thus removing that advantage?

Regardless, while I find the research interesting I will probably always have doubts or concerns so I don't do it.
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Re: Paul Merriman and Small Cap Value

Post by Jags4186 »

jimmyrules712 wrote: Mon Dec 18, 2017 9:11 am
venkman wrote: Sun Dec 17, 2017 8:41 pm I was playing around with PV, testing TSM vs. SCV. (Numbers include 2017, up through November.)

Since 1995, SCV has outperformed TSM by an average of 1.53% per year. There was never a stretch where TSM outperformed SCV for more than 2 consecutive calendar years. SCV beat TSM in 15 out of the 23 years (including TSM's win this year).

SCV beat TSM seven years in a row, from 2000-2006. Since 2007, TSM has beaten SCV an average of 0.12% per year. If that's an extended "losing streak" for SCV, I would happily live with it, in exchange for the higher returns during the winning streaks.

Obviously, TSM and SCV are going to be a lot closer on a risk-adjusted basis, but the type of people who tend to tilt toward SCV generally understand and are okay with the added risk.

What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
Was this testing done using real life ETF or mutual funds or just a theoretical basket of stocks? My concerns over SCV tilting are whether or not I can trust something like Vanguards Small Cap value mutual fund to really capture that premium. I know SCV outperforms in theory.

Comparing VSIAX to VTSAX it looks like over the last 1 year total market is up 17.76% with Small value up 6.76%. Over 5 years Total is up 91.07% and small value 85.32%. If I go back to 2011, which is when the small value fund was created, it looks like total market is up 133.43% and small value is up 134.41%. I guess maybe that confirms that over the long run small value may get you some extra performance but I'm not sure 1% total over 6 years is enough to convince me it's worth it.

Ultimately what I keep coming back to is if there's a sure fire magical way to outperform the market by slicing or tilting, then wouldn't every MF manager out there doing the same thing, thus removing that advantage?

Regardless, while I find the research interesting I will probably always have doubts or concerns so I don't do it.
Try using investor shares--VTSMX and VISVX. Since January 1999 Vanguard's SCV fund is up 510% vs 230% with the TSM.

Vanguards Small Cap Value fund isn't even all that small are valuey. Use DFA's samll cap value fund, DFSVX and it was up 644% from 1999 until today. Of course you would have had to pay an advisor fee bringing that return down probably in line with Vanguard's fund.

Merriman's big position with SCV is that its gains are historically much better than the S&P500 but it's losses are not much lower. Of course SCV will perform differently year in and year out than the S&P500 so looking at it in 1, 3, or 5 year increments doesn't mean much. Recently the S&P 500 has done spectacularly. It also has had some incredibly awful years since the year 2000.
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Re: Paul Merriman and Small Cap Value

Post by deltaneutral83 »

nedsaid wrote: Sun Dec 17, 2017 5:40 pm These trends can last a long time, sometimes a decade or more. That is a long time to wait, hoping for the market to turn.
Merriman's analysis of SCV goes back to 1928. I haven't fact checked his data and I am not going to as I am fine with accepting it. Roughly, over the 89 years since 1928 it's been up 59, S&P up 30. The averages (and be careful of what that word entails) for when SCV is up are higher than for the S&P when it's up per year. You can dive into his numbers in the podcast. The case for SCV going forward is as strong as any other factor tilt out there IMO, and I do so. If one holds the World that is cap weighted and is against tilting, then this is a moot point. I believe the overwhelming majority of BH tilt (of their equity AA) though. It's also my only separate asset class tilt (US total + Tot Intl are core).
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Re: Paul Merriman and Small Cap Value

Post by bikechuck »

I respect Paul Merriman and I enjoy listening to his podcasts and reading his blog.

He is not the only financial professional that suggests owning small cap value. Recently I read a book by Daniel Solin "The Smartest Portfolio You Will Ever Own". Mr. Solin's suggestions mirror Mr. Merriman's very closely.

I think that they are right and I have invested in a small cap value index fund which represents approximately 10% of my equity holdings. So I have incorporated this tilt. It does not complicate things very much at all and it should result in higher long term performance.
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Re: Paul Merriman and Small Cap Value

Post by willthrill81 »

deltaneutral83 wrote: Mon Dec 18, 2017 11:37 am
nedsaid wrote: Sun Dec 17, 2017 5:40 pm These trends can last a long time, sometimes a decade or more. That is a long time to wait, hoping for the market to turn.
Merriman's analysis of SCV goes back to 1928. I haven't fact checked his data and I am not going to as I am fine with accepting it. Roughly, over the 89 years since 1928 it's been up 59, S&P up 30. The averages (and be careful of what that word entails) for when SCV is up are higher than for the S&P when it's up per year. You can dive into his numbers in the podcast. The case for SCV going forward is as strong as any other factor tilt out there IMO, and I do so. If one holds the World that is cap weighted and is against tilting, then this is a moot point. I believe the overwhelming majority of BH tilt (of their equity AA) though. It's also my only separate asset class tilt (US total + Tot Intl are core).
For me, the most telling aspect regarding SCV's performance is that over every twenty period in the historic record, SCV has had higher returns than the S&P 500 with only one exception. That is very consistent long-term performance, not the 'only periodic outperformance' that some claim that SCV has had.

That being said, if you truly believe in tilting, you must be aware that the expected outperformance might take a decade or more to manifest itself, and it might not ever do so.

Regarding Paul Merriman, who I respect very much, I don't believe that he advocates for 'extreme' tilting toward any asset class, including SCV, with the potential exception of investing for young children who will likely have an investment horizon of 80 years or more. I think he is wise to recommend this, because as he says "something in my portfolio is always doing well." Many, perhaps most, investors will grow uneasy if they see their sole holding underperforming a widely publicized asset class like the S&P 500 for years on end.
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GridironGems
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Re: Paul Merriman and Small Cap Value

Post by GridironGems »

livesoft wrote: Mon Dec 18, 2017 7:37 am
GridironGems wrote: Sun Dec 17, 2017 5:32 pm I don't think people here are too fond of small cap value and would only consider a small percentage of it, if at all. Just found it interesting how Paul Merriman keeps talking it up
Merriman has been talking it up for more than 30 years I think. LOTS of Bogleheads are quite fond of small cap value, so I am not sure why you got the impression you have. Previous polls on the forum show many many many people on the forum tilt to small cap and value.

Here a thread to read: viewtopic.php?t=96441
Ah ok, I just found Paul Merriman recently and have listened to his latest podcasts. I also just found this site a few months ago and haven't seen much talk on small cap value, just the S&P 500 and Total Stock Market
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Re: Paul Merriman and Small Cap Value

Post by GridironGems »

Currently I just own the 2050 Target Retirement Fund, VTI, and VXUS.

Should I add small cap value to my portfolio, or just keep on adding to those 3 funds?

Vanguard has:
Vanguard Small-Cap Value ETF (VBR) and
Vanguard S&P Small-Cap 600 Value ETF (VIOV)

Do you guys use either of these 2 funds?
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Re: Paul Merriman and Small Cap Value

Post by livesoft »

^Small-cap value is going to be one of the worst performing stock asset classes for 2017. But 2016, was a great year.

While one can look at total return from Date X to Date Y, I don't think that's the way to really know what this asset class can do for one's portfolio. One has to sell it when it goes up big-time (and it went up big-time in late 2016) and one has to buy it when it is the worst performing asset class. One cannot simply buy-and-hold this asset class. One has to Buy-Hold-and-Rebalance. Or one has to Market-Time this asset class.

SCV needs its cheerleaders in years like 2017 ... otherwise lots of folks would give up on it.

I own VBR and IJS at the present time. I only buy some shares when they drop in price. And I sell shares when they go up. That is, I have rebalancing bands and reasonable trigger points for buying and selling.

If you have to ask us whether you should buy some, then I think you should not buy some. You are not convinced yet and don't have your own convictions on this. That's why stlutz's thread is so funny: You just asked "What should I do?" :D
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Re: Paul Merriman and Small Cap Value

Post by willthrill81 »

GridironGems wrote: Mon Dec 18, 2017 1:57 pm Currently I just own the 2050 Target Retirement Fund, VTI, and VXUS.

Should I add small cap value to my portfolio, or just keep on adding to those 3 funds?

Vanguard has:
Vanguard Small-Cap Value ETF (VBR) and
Vanguard S&P Small-Cap 600 Value ETF (VIOV)

Do you guys use either of these 2 funds?
No one can tell you with any certainty how anything will perform going forward. It is up to you to determine which investments are appropriate for you.

I suggest that you carefully read the arguments both for and against tilting toward small cap value. Generally, I believe that Bogleheads are in favor of this tilt, but this is no guarantee of anything.
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Re: Paul Merriman and Small Cap Value

Post by deltaneutral83 »

livesoft wrote: Mon Dec 18, 2017 2:01 pm ^Small-cap value is going to be one of the worst performing stock asset classes for 2017. But 2016, was a great year.

While one can look at total return from Date X to Date Y, I don't think that's the way to really know what this asset class can do for one's portfolio. One has to sell it when it goes up big-time (and it went up big-time in late 2016) and one has to buy it when it is the worst performing asset class. One cannot simply buy-and-hold this asset class. One has to Buy-Hold-and-Rebalance. Or one has to Market-Time this asset class.

SCV needs its cheerleaders in years like 2017 ... otherwise lots of folks would give up on it.

I own VBR and IJS at the present time. I only buy some shares when they drop in price. And I sell shares when they go up. That is, I have rebalancing bands and reasonable trigger points for buying and selling.

If you have to ask us whether you should buy some, then I think you should not buy some. You are not convinced yet and don't have your own convictions on this. That's why stlutz's thread is so funny: You just asked "What should I do?" :D
I think Merriman does this with his portfolio, but I can't think it's a good idea for regular folks to time the market. In fact, isn't that just basically swing trading? Anything incorporating trigger bands is probably not something even most BH are inclined to engage. I mean, why wouldn't you just apply the same set of guidelines to the Total market, buy it on dips, and sell it at highs? I had thought I recalled that Merriman recommends folks in their 20's and early 30's to load up on SCV to the tune of like 20%-25% of their equities and staying the course so to speak? Have we had one rolling 20 year since 1928 when SCV under-performed the S&P? I don't ask this as to guarantee future results obviously, but moreso to ask if the SCV premium outweighs the risk, which I think it does moving forward (buy and hold) in 20/25/30 year horizons. But of course I know this is is NOT guaranteed as very little else is.
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Re: Paul Merriman and Small Cap Value

Post by livesoft »

I'm not sure what you mean. If you have a 50% of equities position in small-cap value, what would be swing trading? Going to 0% sometimes? Or would it be rebalancing between 45% and 55%?
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Re: Paul Merriman and Small Cap Value

Post by GridironGems »

livesoft wrote: Mon Dec 18, 2017 2:01 pm ^Small-cap value is going to be one of the worst performing stock asset classes for 2017. But 2016, was a great year.

While one can look at total return from Date X to Date Y, I don't think that's the way to really know what this asset class can do for one's portfolio. One has to sell it when it goes up big-time (and it went up big-time in late 2016) and one has to buy it when it is the worst performing asset class. One cannot simply buy-and-hold this asset class. One has to Buy-Hold-and-Rebalance. Or one has to Market-Time this asset class.

SCV needs its cheerleaders in years like 2017 ... otherwise lots of folks would give up on it.

I own VBR and IJS at the present time. I only buy some shares when they drop in price. And I sell shares when they go up. That is, I have rebalancing bands and reasonable trigger points for buying and selling.

If you have to ask us whether you should buy some, then I think you should not buy some. You are not convinced yet and don't have your own convictions on this. That's why stlutz's thread is so funny: You just asked "What should I do?" :D
Haha fair enough. VIOV has out performed VBR, but since we do not know what the future holds, do you own VBR just because of the lower expense ratio? Also why own IJS when it has a higher ER than VIOV?
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Re: Paul Merriman and Small Cap Value

Post by venkman »

bertilak wrote: Mon Dec 18, 2017 8:16 am IF size/value risk gets more return for the same amount of risk (risk-adjusted return) then there is a real reason to go for it. The case for that seems less certain then simply "more risk equals more return." I don't discount the possibility of better risk-adjusted return for SCV, I am simply not energetic enough to follow the arguments so would need a simpler explanation. I guess one needs to allocate one's time and brainpower to the most likely return on THAT investment!
I operate under the assumption that SCV and TSM will have about equal risk-adjusted returns over the long term. And I definitely think that any investor would be fine if they only invested in TSM. The real draw of SCV is that the factors of market, value, and size tend to be relatively uncorrelated with each other, and a SCV tilt gives you factor exposure that is lacking in a 100% TSM portfolio.

There's also the theory behind the Larry Portfolio, which is that if you increase your exposure to the riskiest stocks, you can decrease the overall equity percentage of your portfolio, and get the same expected return, with less risk overall.
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Re: Paul Merriman and Small Cap Value

Post by Longtermgrowth »

Comparing these funds average market cap on Morningstar, along with looking at their value tilt in the Morningstar 9 box style grid is helpful. VBR has a decent amount of mid caps in it compared to VIOV, but VBR also has more of a value tilt.

I really like international small value, since international small caps derive more of their revenue from their local economies than the large cap multinational stocks, having less correlation to U.S. stocks along with higher expected return.
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Re: Paul Merriman and Small Cap Value

Post by Crushtheturtle »

^^
livesoft wrote: Mon Dec 18, 2017 2:01 pm One cannot simply buy-and-hold this asset class.
Why do you keep saying this?

Reference:

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

Portfolio 1: 100% US Stock Market
Portfolio 2: 100% US Small Cap Value

January 1972- November 2017
--------------------------------TSM---------------------------SCV
Initial Balance--------------$10,000------------------$10,000
Final Balance---------------$941,008-----------------$4,820,236
CAGR-------------------------10.40%-------------------14.40%
Stdev-------------------------15.39%-------------------17.80%
Best yr------------------------37.82%-------------------54.78%
Worst yr----------------------(37.04%)-----------------(32.05%)
Max drawdown--------------(50.89%)-----------------(56.13%)
Sharpe ratio------------------0.42----------------------0.59
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Re: Paul Merriman and Small Cap Value

Post by Longtermgrowth »

Crushtheturtle wrote: Mon Dec 18, 2017 11:57 pm ^^
livesoft wrote: Mon Dec 18, 2017 2:01 pm One cannot simply buy-and-hold this asset class.
Why do you keep saying this?
I look forward to hearing livesoft's response. triceratop's view of livesoft's reasoning for saying that: viewtopic.php?f=10&t=234293&p=3662082#p3662079
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Re: Paul Merriman and Small Cap Value

Post by csm14 »

Slightly unrelated but: if you believe that there's a trend towards large corporations continuing to consolidate and flexing its muscle in the market, would that hypothetically affect small cap?
Or does the power of large cap companies not matter when it comes to the returns of small cap value?
Am I conflating two separate issues?

Thanks
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Re: Paul Merriman and Small Cap Value

Post by livesoft »

GridironGems wrote: Mon Dec 18, 2017 9:47 pm Haha fair enough. VIOV has out performed VBR, but since we do not know what the future holds, do you own VBR just because of the lower expense ratio? Also why own IJS when it has a higher ER than VIOV?
Why do I own VBR? In April 2009, I sold IJS in a tax-loss harvesting move and bought VBR as a replacement. VBR went up so much I am not going to sell it and realize taxable capital gains. Why IJS instead of VIOV? VIOV didn't exist back then. VIOV is not a no-commission ETF at most brokers. VIOV has almost zero average daily volume and I don't want to own 50%, 100%, or more of the daily volume of an ETF.
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Re: Paul Merriman and Small Cap Value

Post by livesoft »

Longtermgrowth wrote: Tue Dec 19, 2017 12:12 am
Crushtheturtle wrote: Mon Dec 18, 2017 11:57 pm ^^
livesoft wrote: Mon Dec 18, 2017 2:01 pm One cannot simply buy-and-hold this asset class.
Why do you keep saying this?
I look forward to hearing livesoft's response. triceratop's view of livesoft's reasoning for saying that: viewtopic.php?f=10&t=234293&p=3662082#p3662079
Thanks for the link which has as good an explanation as any for me.

One of the things I see over and over on this forum is that folks will not buy more shares at buying opportunities when the market goes lower. Many people are proud that they did not "sell out" in 2009 at the bottom, but many of those people did not rebalance into equities back then either. And rebalancing into equities means buying more of the thing that has dropped the mostest. Here is an example of someone rationalizing not buying at the bottom in January 2016: viewtopic.php?p=2759912#p2759912

But Crushtheturle showed results from 1972. Good luck making those results repeat in the future. Here's a chart for 2017:
Image
Could you stand it if your fund trailed by 10% in a year? That's tough to swallow. And it was really tough in July. Did you buy more in July-August?
Last edited by livesoft on Tue Dec 19, 2017 2:23 am, edited 3 times in total.
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Re: Paul Merriman and Small Cap Value

Post by privatefarmer »

MikeMak27 wrote: Mon Dec 18, 2017 7:47 am IJS is probably the best way to get exposure to small value. While it’s expense ratio is higher than others, they do enough share lending to make up for it. It also has the most liquidity. STAY AWAY from the Russell indices as they underperform significantly.

About 95% of my domestic equity allocation is in small value. As others have pointed out it’s performance is robust over any medium or long term period. In the depths of the financial crisis, small value didn’t perform any worse than large blend. I notice on a day to day basis that small value is more volatile, but the swings end up evening out over a long period of time. If you have quite some time before retirement, I think small value is the way to go.
you speak my language, sir. have you looked into DFA? FPL capital management will sell you DFA access for <$1k flat fee. I have half my stocks in DFA small value and half in emerging markets small value. I've got a 30-40 year time horizon, plan to just let it ride and add fixed income to it maybe in 20 years.
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Re: Paul Merriman and Small Cap Value

Post by privatefarmer »

bertilak wrote: Mon Dec 18, 2017 8:16 am
venkman wrote: Sun Dec 17, 2017 8:41 pm What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
If the the SVC premium is due to risk, then why is SCV the best way to take on the risk? Seems simpler to adjust your stock vs bond allocation. That also seems preferable because, I think, the difference between stock and bond risk is :
  • more stable and therefore predictable then the risk along the sliding scales of the size an value spectrums.
  • more distinct (wider) because the risk comes from completely different sources: A stock is risky because your returns are a share of a company's business success, which is uncertain, but bonds are contractual in nature and also take precedence if a company goes into bankruptcy protection.
Apples and oranges instead of varieties of apples.

IF size/value risk gets more return for the same amount of risk (risk-adjusted return) then there is a real reason to go for it. The case for that seems less certain then simply "more risk equals more return." I don't discount the possibility of better risk-adjusted return for SCV, I am simply not energetic enough to follow the arguments so would need a simpler explanation. I guess one needs to allocate one's time and brainpower to the most likely return on THAT investment!
yeah but for those w/ 30+ year time horizon who are already 100% stocks, the only way to up the risk/return is via small/value. also, larry swedroe argues that a more "efficient" way of titrating your risk is to use small/value as your stock holdings and then just add more bonds. this reduces the fat-tail risk, may improve risk-adjusted returns.
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Re: Paul Merriman and Small Cap Value

Post by Longtermgrowth »

Thanks, livesoft. I hope to be able to always rationalize buying the cheapest asset in my portfolio to at least maintain my desired asset allocation.
It felt great buying more of DES last week when it dropped 1.2%. Though it felt just as good watching it gain everything back the next day :)
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Re: Paul Merriman and Small Cap Value

Post by privatefarmer »

jimmyrules712 wrote: Mon Dec 18, 2017 9:11 am
venkman wrote: Sun Dec 17, 2017 8:41 pm I was playing around with PV, testing TSM vs. SCV. (Numbers include 2017, up through November.)

Since 1995, SCV has outperformed TSM by an average of 1.53% per year. There was never a stretch where TSM outperformed SCV for more than 2 consecutive calendar years. SCV beat TSM in 15 out of the 23 years (including TSM's win this year).

SCV beat TSM seven years in a row, from 2000-2006. Since 2007, TSM has beaten SCV an average of 0.12% per year. If that's an extended "losing streak" for SCV, I would happily live with it, in exchange for the higher returns during the winning streaks.

Obviously, TSM and SCV are going to be a lot closer on a risk-adjusted basis, but the type of people who tend to tilt toward SCV generally understand and are okay with the added risk.

What I can't figure out is why so many people here don't trust the outperformance of SCV (which is explained by a risk premium), but they're all-in with the idea that stocks will outperform bonds over the long term, because of the equity risk premium.
Was this testing done using real life ETF or mutual funds or just a theoretical basket of stocks? My concerns over SCV tilting are whether or not I can trust something like Vanguards Small Cap value mutual fund to really capture that premium. I know SCV outperforms in theory.

Comparing VSIAX to VTSAX it looks like over the last 1 year total market is up 17.76% with Small value up 6.76%. Over 5 years Total is up 91.07% and small value 85.32%. If I go back to 2011, which is when the small value fund was created, it looks like total market is up 133.43% and small value is up 134.41%. I guess maybe that confirms that over the long run small value may get you some extra performance but I'm not sure 1% total over 6 years is enough to convince me it's worth it.

Ultimately what I keep coming back to is if there's a sure fire magical way to outperform the market by slicing or tilting, then wouldn't every MF manager out there doing the same thing, thus removing that advantage?

Regardless, while I find the research interesting I will probably always have doubts or concerns so I don't do it.
have pondered the same stuff myself. DFA introduced their small value fund in the early 90's, DFSVX. it's killed the total market since inception. it's also beaten the small value indexes that vanguard and ishares track. but maybe they just got lucky, totally possible.

as far as the credibility of the SCV outperformance since before there was an index fund, i guess we can never know what would have happened had there been an easily investable SCV index fund back in say the 1930s. probably more people would have invested in the asset class. that may have created a bubble, ultimately driving people out of the asset class. so as far as long-term, 10-30 year time horizons, it probably doesn't matter much. maybe we are in a "bubble" now bc SCV is so easily accessible as compared to 30 years ago, however so is the rest of the stock market (and real estate market, and bonds, and commodities, and bitcoin, etc etc).

also, the SCV index typically turns over ~5 years or so, so if you look at an index fund that's been around 20-30 years (like VISVX or DFSVX), you can see that it has consistently outperformed with different groups of stocks again and again. not 100% consistent of course, but more often than naught it has outperformed large cap and the SCV stocks of the 90s or early 2000s are different than the SCV stocks today because of turnover.

I always come back to the premise that why would anyone own SCV over the S/p 500 unless they EXPECTED a higher return? Does not mean that they will get what they expect, but that is the only logical explanation for owning a more volatile asset. exact same thing as stocks over bonds.
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Re: Paul Merriman and Small Cap Value

Post by livesoft »

Longtermgrowth wrote: Tue Dec 19, 2017 2:03 am Thanks, livesoft. I hope to be able to always rationalize buying the cheapest asset in my portfolio to at least maintain my desired asset allocation.
It felt great buying more of DES last week when it dropped 1.2%. Though it felt just as good watching it gain everything back the next day :)
On December 1st, IJS dropped more than 3% intraday. That doesn't even show up on the charts anymore. In the chart below, that drop was so large that it was "off the chart":

Image
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Re: Paul Merriman and Small Cap Value

Post by Longtermgrowth »

Shows it literally pays to pay attention to the small value asset class. Rather allocating a percentage of ones portfolio to it and rebalancing annually, or adding more money on those more volatile days throughout the year, or having predetermined rebalancing bands =)
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Re: Paul Merriman and Small Cap Value

Post by triceratop »

livesoft wrote: Tue Dec 19, 2017 2:33 am
Longtermgrowth wrote: Tue Dec 19, 2017 2:03 am Thanks, livesoft. I hope to be able to always rationalize buying the cheapest asset in my portfolio to at least maintain my desired asset allocation.
It felt great buying more of DES last week when it dropped 1.2%. Though it felt just as good watching it gain everything back the next day :)
On December 1st, IJS dropped more than 3% intraday. That doesn't even show up on the charts anymore. In the chart below, that drop was so large that it was "off the chart":

Image
But I bought IJS on 08/17 and again on 08/21. I suspect it would show up on a chart that started then.
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Re: Paul Merriman and Small Cap Value

Post by livesoft »

triceratop wrote: Tue Dec 19, 2017 3:12 amBut I bought IJS on 08/17 and again on 08/21. I suspect it would show up on a chart that started then.
Then you answered the question I asked after the first chart I posted. :)
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Re: Paul Merriman and Small Cap Value

Post by bertilak »

privatefarmer wrote: Tue Dec 19, 2017 2:01 am yeah but for those w/ 30+ year time horizon who are already 100% stocks, the only way to up the risk/return is via small/value.
Good point. I was seeing things from my perspective of being retired already.

also, larry swedroe argues that a more "efficient" way of titrating your risk is to use small/value as your stock holdings and then just add more bonds. this reduces the fat-tail risk, may improve risk-adjusted returns.
Now we are getting into an area outside of my internalized-knowledge comfort zone. I can follow the discussions and the gist of the math and charts but I still have that "a little knowledge is a dangerous thing" feeling.
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Re: Paul Merriman and Small Cap Value

Post by GreatOdinsRaven »

GridironGems wrote: Mon Dec 18, 2017 9:47 pm
livesoft wrote: Mon Dec 18, 2017 2:01 pm ^Small-cap value is going to be one of the worst performing stock asset classes for 2017. But 2016, was a great year.

While one can look at total return from Date X to Date Y, I don't think that's the way to really know what this asset class can do for one's portfolio. One has to sell it when it goes up big-time (and it went up big-time in late 2016) and one has to buy it when it is the worst performing asset class. One cannot simply buy-and-hold this asset class. One has to Buy-Hold-and-Rebalance. Or one has to Market-Time this asset class.

SCV needs its cheerleaders in years like 2017 ... otherwise lots of folks would give up on it.

I own VBR and IJS at the present time. I only buy some shares when they drop in price. And I sell shares when they go up. That is, I have rebalancing bands and reasonable trigger points for buying and selling.

If you have to ask us whether you should buy some, then I think you should not buy some. You are not convinced yet and don't have your own convictions on this. That's why stlutz's thread is so funny: You just asked "What should I do?" :D
Haha fair enough. VIOV has out performed VBR, but since we do not know what the future holds, do you own VBR just because of the lower expense ratio? Also why own IJS when it has a higher ER than VIOV?
I own VBR (taxable account), IJS (taxable account), & DFA’s SCV fund DFSVX (401k). I originally bought VBR because the Vanguard page for VIOV actually encourages one to buy or at least consider VBR instead. So, I bought VBR. When I learned more about factor weightings and learned how to run a quick factor regression on portfolio visualizer I realized that I get more heavy factor weightings for IJS than for VBR. In fact for some reason IJS has had higher factor loagings for small and value than even VIOV even though they’re supposed to track the same index. So, my new contributions started going to IJS in my taxable account and continued with DFSVX in my 401(k). It’s also more liquid and the last time I checked the bid-offer spreads were tighter with IJS than with VIOV. I don’t sell at all unless I’m tax loss harvesting and if I do that I’d probably TLH into VBR. But after my TLH wash sale window passes I’d go right back into investing in IJS. If you’re a factor investor and you really want to capture the positive or negative factor premium then it just makes sense that you’d get the most bang for your buck (good or bad).

Here’s Vanguard’s page suggesting that one consider VBR instead of VIOV because it’s cheaper.
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Re: Paul Merriman and Small Cap Value

Post by cp73 »

I listen to Merriman's podcast all the time. I like him. I also have tilted somewhat to SCV. Interesting thing I found was when looking at Simba's spreadsheet and backtested by including 10% SCV to a 60/40 portfolio the returns went up but also the risk (std deviation, betas, etc) either went down or stayed the same. So more upside with the same or no more risk. At least looking backwards. But you can't look forward!
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Re: Paul Merriman and Small Cap Value

Post by MikeMak27 »

livesoft wrote: Tue Dec 19, 2017 1:42 am
Longtermgrowth wrote: Tue Dec 19, 2017 12:12 am
Crushtheturtle wrote: Mon Dec 18, 2017 11:57 pm ^^
livesoft wrote: Mon Dec 18, 2017 2:01 pm One cannot simply buy-and-hold this asset class.
Why do you keep saying this?
I look forward to hearing livesoft's response. triceratop's view of livesoft's reasoning for saying that: viewtopic.php?f=10&t=234293&p=3662082#p3662079
Thanks for the link which has as good an explanation as any for me.

One of the things I see over and over on this forum is that folks will not buy more shares at buying opportunities when the market goes lower. Many people are proud that they did not "sell out" in 2009 at the bottom, but many of those people did not rebalance into equities back then either. And rebalancing into equities means buying more of the thing that has dropped the mostest. Here is an example of someone rationalizing not buying at the bottom in January 2016: viewtopic.php?p=2759912#p2759912

But Crushtheturle showed results from 1972. Good luck making those results repeat in the future. Here's a chart for 2017:
Image
Could you stand it if your fund trailed by 10% in a year? That's tough to swallow. And it was really tough in July. Did you buy more in July-August?
Only showing a chart for 2017 is very misleading. IJS outperform IVV considerably in 2016. In fact IJS was up 31.25% compared to 11.96% for IVV. That makes the pill much easier to swallow.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)
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Re: Paul Merriman and Small Cap Value

Post by GreatOdinsRaven »

cp73 wrote: Tue Dec 19, 2017 10:23 am At least looking backwards. But you can't look forward!
Correct! You’ve hit the nail on the head. That’s the problem with MVO and the efficient frontier. It is in continual evolution and we won’t know the optimal portfolio a priori.

I’ve made an active bet on SCV, MCV, US equities (in general) and EM equities- because I don’t hold the global market portfolio which if we use Vanguard’s Total World Market Index ETF (VT) holds:

Image

Image

And, looking at the Morningstar style box the Vanguard Total World Stock ETF (VT) looks nothing like my own portfolio. I have tons of static strategic active allocation bets everywhere- slight overweight to US, overweight of EM, and US and Intl SCV... I’d imagine most Bogleheads also have active bets against a global market cap index, favoring 80-100% US equities and it’s worked in their favor (in the relatively recent past). But, who knows what the future holds? From a future expected returns perspective EM and to a lesser extent Intl developed are supposed to do better than the US. But that doesn’t mean they will. They have over the past year or so. No guarantee that will continue, though.

That’s why I think it’s more important to pick an allocation and stick with it through thick and thin, than it is to tactically move around or tactically tilt. If it’s in your strategy to tilt, then great. Do it. But stick with it for years and years and years if it underperforms. Otherwise you’ve paid the price of admission to the ride (years of poor performance), but you exit the line before taking the ride, itself.

I’ve seen very few Bogleheads who hold a world stock index allocation across their portfolios. Nothing wrong with that at all. There are many roads to Dublin.
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Re: Paul Merriman and Small Cap Value

Post by GreatOdinsRaven »

livesoft wrote: Tue Dec 19, 2017 1:42 am But Crushtheturle showed results from 1972. Good luck making those results repeat in the future. Here's a chart for 2017:
Image
Could you stand it if your fund trailed by 10% in a year? That's tough to swallow. And it was really tough in July. Did you buy more in July-August?
Yes. Yes, I bought more in July-August. In fact I buy more biweekly without fail. Because, I’m young and won’t need this money for 20-30 years and the odds are in my favor that my investment will be worth more then than now. Short interval relative returns differences are little more than noise with minimal signal.

People spend entirely too much time comparing short interval relative returns in an individual portfolio. If one is going to peek at all it should be to assess total portfolio return and that should be limited as well. Certainly not relative returns over a period of less than 10 years...
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Re: Paul Merriman and Small Cap Value

Post by paul merriman »

I will weigh in more later but my quick comment is I am a huge fan of Total Market Index as a relatively small part of my portfolio. I use S&P 500, instead of the total market as the rest of the portfolio is comprised of large value (U.S. and Intl.), small blend (U.S. and intl.), small value (U.S. and intl.), emerging markets and REITs. This means I have the total market but in different percentages as I would get from the total market index. When I get back I will address who I think should be all small cap value.
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Re: Paul Merriman and Small Cap Value

Post by Taylor Larimore »

bikechuck wrote: Mon Dec 18, 2017 11:44 am Recently I read a book by Daniel Solin "The Smartest Portfolio You Will Ever Own". Mr. Solin's suggestions mirror Mr. Merriman's very closely.
Not exactly. Mr. Solin devotes an entire Chapter to "The Smartest Index Fund Portfolio." He writes: "The chart below shows the composition of the Smartest Index Fund Portfolio." Vanguard Total Stock Market, Vanguard Total International, and Vanguard Total Bond Market."

To be sure, Mr. Solin advocates several other "Smart Portfolios," but The Three-Fund Portfolio is one of them.

At the moment, The Second Grader Starter, Three-Fund Portfolio, is leading the MarketWatch competition:

https://www.marketwatch.com/lazyportfolio

Best wishes.
Taylor
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