Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

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BWildt
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Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by BWildt » Sun Jul 08, 2018 4:08 pm

It seems to me that investing in SCV is completely contradictory for Bogleheads, particularly having a substantial allocation towards SCV. Aren't we Bogleheads supposed to believe in reversion to the mean, and that the past is not prologue? How do those who invest in SCV reconcile with those foundational principles? Jack Bogle himself has noted that SCV has underperformed the S&P 500 for vast periods of time.

What am I missing?

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by PhilosophyAndrew » Sun Jul 08, 2018 4:17 pm

I don’t think it makes sense to evaluate one component of a portfolio and isolation from the rest of the components, but I see no reason why a Boglehead could not include such a tilt if he or she had a reasonable rationale.

I know that Mr. Bogle rites a lot about the concept of mean reversion but as far as I know none of the Boglehead investing principles (see link, below) depend on that concept.

https://www.bogleheads.org/wiki/Boglehe ... philosophy


Andy.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by Call_Me_Op » Sun Jul 08, 2018 4:35 pm

BWildt wrote:
Sun Jul 08, 2018 4:08 pm
It seems to me that investing in SCV is completely contradictory for Bogleheads, particularly having a substantial allocation towards SCV. Aren't we Bogleheads supposed to believe in reversion to the mean, and that the past is not prologue? How do those who invest in SCV reconcile with those foundational principles? Jack Bogle himself has noted that SCV has underperformed the S&P 500 for vast periods of time.

What am I missing?
I would say there are at least a couple of things you are missing. First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself. Second, being a member of the Bogleheads community does not require swearing an oath to follow John Bogle's investment advice to the letter. Many of us tilt to SCV, and with good outcomes. And we are still Bogleheads.

Also, not sure what you mean by reversion to the mean - but I am pretty sure you are misapplying the idea in this case.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by ThriftyPhD » Sun Jul 08, 2018 5:22 pm

Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself.
Not that I'm against SCV, but there are some examples where the 500 outperformed. I obviously cherry picked dates, but that's 14 years. Easy find examples of the opposite too, where SCV outperforms.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by jacoavlu » Sun Jul 08, 2018 5:30 pm

not purely contradictory but you’ll certainly never come close to Operating Thetan Level VIII holding substantial SCV

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by JoMoney » Sun Jul 08, 2018 5:30 pm

It is in stark contrast with the investing advice of Jack Bogle.
It is inline with the frequent, although controversial, advice offered by many Bogleheads.
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by Call_Me_Op » Sun Jul 08, 2018 5:38 pm

ThriftyPhD wrote:
Sun Jul 08, 2018 5:22 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself.
Not that I'm against SCV, but there are some examples where the 500 outperformed. I obviously cherry picked dates, but that's 14 years. Easy find examples of the opposite too, where SCV outperforms.
Nobody has ever claimed that SCV will beat S&P 500 over every time period. One can, of course, cherry pick limited time periods where SCV has lagged. But in the vast majority of rolling 40 year periods, SCV has won by a large margin.

I like the idea of holding some of both and periodically rebalancing.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by dcabler » Sun Jul 08, 2018 5:41 pm

Here's the philosophy:
1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course

Nope, I don't see "Though shalt not invest substantial amounts in SCV", especially if you can do it within the 10 guidelines above, many of which are in the eye of the beholder...

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by JoMoney » Sun Jul 08, 2018 5:56 pm

ThriftyPhD wrote:
Sun Jul 08, 2018 5:22 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself.
Not that I'm against SCV, but there are some examples where the 500 outperformed. I obviously cherry picked dates, but that's 14 years. Easy find examples of the opposite too, where SCV outperforms.
FWIW, Morningstar's SV benchmark based on real-world "Open End" Small Value mutual funds certainly doesn't demonstrate the performance suggested by the academic back-tested portfolio.
Morningstar US Open-End Small-Value benchmark vs. S&P 500
Last edited by JoMoney on Sun Jul 08, 2018 6:01 pm, edited 1 time in total.
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by david1082b » Sun Jul 08, 2018 6:00 pm

Jack Bogle doesn't like to invest in non-US tocks, he uses the last twenty five years of performance as one example of why. I've never seen him say that US small-cap value is something he prefers despite it outperforming in the last twenty to twenty five years. I imagine that Jack has been happy with his returns from the total US market and sees little reason to get jealous of the very long-term small-cap value outperformance. He just compares his portfolios to people who owned non-US stocks and made lower returns than him.

Many Bogleheads simply get a global stock market portfolio and just take whatever it gives, without worrying too much about returns. If you avoid small-cap value tilting, do you then have to get non-US stocks too?

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by stan1 » Sun Jul 08, 2018 6:02 pm

JoMoney wrote:
Sun Jul 08, 2018 5:56 pm
ThriftyPhD wrote:
Sun Jul 08, 2018 5:22 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself.
Not that I'm against SCV, but there are some examples where the 500 outperformed. I obviously cherry picked dates, but that's 14 years. Easy find examples of the opposite too, where SCV outperforms.
FWIW, Morningstar's SV benchmark based on real-world SV mutual funds certainly doesn't demonstrate the performance suggested by the academic back-tested portfolio.
Morningstar US Small-Value benchmark vs. S&P 500
Funny thing, if you use the two sliders at the bottom of the chart to adjust the timeframes you get a different answer every time you change the dates! Imagine that! So not quite a slam dunk. Maybe if one does a little bit of rebalancing when one is up over the other you'll do a little better over all? Your call.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by Jags4186 » Sun Jul 08, 2018 6:09 pm

JoMoney wrote:
Sun Jul 08, 2018 5:56 pm
ThriftyPhD wrote:
Sun Jul 08, 2018 5:22 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself.
Not that I'm against SCV, but there are some examples where the 500 outperformed. I obviously cherry picked dates, but that's 14 years. Easy find examples of the opposite too, where SCV outperforms.
FWIW, Morningstar's SV benchmark based on real-world "Open End" Small Value mutual funds certainly doesn't demonstrate the performance suggested by the academic back-tested portfolio.
Morningstar US Open-End Small-Value benchmark vs. S&P 500
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by fortyofforty » Sun Jul 08, 2018 6:16 pm

There are no pure Bogleheads, even not Jack Bogle. We're all feeling our way along, the best we can, with terribly limited ability to predict the future.
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by JoMoney » Sun Jul 08, 2018 6:16 pm

Jags4186 wrote:
Sun Jul 08, 2018 6:09 pm
.
Yes, that is an example of the conflict between real-world Small Value mutual funds (as Morningstar uses to create it's benchmark) vs. that of an academic reconstructed portfolios (that some argue is fitted to the result they were looking for)
PV describes it's Data Sources in the FAQ
https://www.portfoliovisualizer.com/faq
US Small Cap Value
Professor Kenneth French's Research Data1 1972-1998
Vanguard Small Cap Value Index Fund (VISVX) 1999+
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by ThriftyPhD » Sun Jul 08, 2018 6:18 pm

Call_Me_Op wrote:
Sun Jul 08, 2018 5:38 pm
Nobody has ever claimed that SCV will beat S&P 500 over every time period.
Well, you did.
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong.
Obviously depending on what you mean by long time period, but I found a 14 year period where SCV under-performed the S&P500. As I said, I cherry picked, but there are long time periods where SCV underperforms and has a lot more volatility.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by youngpleb » Sun Jul 08, 2018 8:22 pm

BWildt wrote:
Sun Jul 08, 2018 4:08 pm
It seems to me that investing in SCV is completely contradictory for Bogleheads, particularly having a substantial allocation towards SCV. Aren't we Bogleheads supposed to believe in reversion to the mean, and that the past is not prologue? How do those who invest in SCV reconcile with those foundational principles? Jack Bogle himself has noted that SCV has underperformed the S&P 500 for vast periods of time.

What am I missing?
Please explain to me how reversion to the mean puts a SCV tilt in anything other than a good light?
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by averagedude » Sun Jul 08, 2018 8:29 pm

dcabler wrote:
Sun Jul 08, 2018 5:41 pm
Here's the philosophy:
1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course

Nope, I don't see "Though shalt not invest substantial amounts in SCV", especially if you can do it within the 10 guidelines above, many of which are in the eye of the beholder...
I agree and im sure Jack would too.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by stlutz » Sun Jul 08, 2018 8:31 pm

People on this board adopt all sorts of tilts. The global stock market is about 40% stocks. Most people have higher equity allocations than that. Is that deviation from the market contradictory?

The global equity market is about 53% US stocks. Most people here have a higher weighting than this. Is that deviation from the market contradictory?

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by randomguy » Sun Jul 08, 2018 9:37 pm

Call_Me_Op wrote:
Sun Jul 08, 2018 5:38 pm
ThriftyPhD wrote:
Sun Jul 08, 2018 5:22 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself.
Not that I'm against SCV, but there are some examples where the 500 outperformed. I obviously cherry picked dates, but that's 14 years. Easy find examples of the opposite too, where SCV outperforms.
Nobody has ever claimed that SCV will beat S&P 500 over every time period. One can, of course, cherry pick limited time periods where SCV has lagged. But in the vast majority of rolling 40 year periods, SCV has won by a large margin.

I like the idea of holding some of both and periodically rebalancing.
This is like saying never hold bonds since stocks have always outperformed them:) Jack is right that there are numerous 10 year periods of SCV underperformance. It is also right that as you extent the time period eventually you will hit some place where SCV will have outperformed the S&P 500. The questions is can you stay the course and does the outperformance match up with your needs.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by willthrill81 » Sun Jul 08, 2018 10:33 pm

Call_Me_Op wrote:
Sun Jul 08, 2018 5:38 pm
ThriftyPhD wrote:
Sun Jul 08, 2018 5:22 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods). Look at the data yourself.
Not that I'm against SCV, but there are some examples where the 500 outperformed. I obviously cherry picked dates, but that's 14 years. Easy find examples of the opposite too, where SCV outperforms.
Nobody has ever claimed that SCV will beat S&P 500 over every time period. One can, of course, cherry pick limited time periods where SCV has lagged. But in the vast majority of rolling 40 year periods, SCV has won by a large margin.

I like the idea of holding some of both and periodically rebalancing.
I recall Paul Merriman saying that SCV has beaten the S&P 500 in every 20 year period with only one exception. That's not outperformance that is limited to only a handful of years.

And Merriman also recommends holding some of both and rebalancing. Half of his "ultimate buy-and-hold" portfolio is blend and the other half is value. And about half of it is large, and half of it is small.
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by venkman » Sun Jul 08, 2018 11:47 pm

BWildt wrote:
Sun Jul 08, 2018 4:08 pm
How do those who invest in SCV reconcile with those foundational principles? Jack Bogle himself has noted that SCV has underperformed the S&P 500 for vast periods of time.
The foundational principle underlying ALL financial markets is that risk and reward are positively correlated. Investors will demand a higher expected return for investing in an asset that has more risk. As long as SCV companies have a higher chance of going completely to zero, their stocks should command a risk premium over the stocks of larger, more stable companies. There are times when the small and/or value premia will go negative, just as there are times when the equity risk premium will go negative; but there's still a solid basis to believe that SCV stocks will outperform over the long term. (I don't have the numbers in front of me, but I believe that when SCV underperforms, it does so by a small amount. When it outperforms, it tends to do so by a large amount.)

Note that I don't believe SCV will continue to outperform to the degree it has historically. I think a good chunk of that outperformance in the past was a liquidity premium, which has been mostly eliminated by now.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by KyleAAA » Mon Jul 09, 2018 12:46 am

No. Picking an allocation and sticking to it is as bogleheads as it gets,

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by Call_Me_Op » Mon Jul 09, 2018 6:08 am

ThriftyPhD wrote:
Sun Jul 08, 2018 6:18 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 5:38 pm
Nobody has ever claimed that SCV will beat S&P 500 over every time period.
Well, you did.
Untrue. Please identify where I said that.
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by ThriftyPhD » Mon Jul 09, 2018 6:24 am

Call_Me_Op wrote:
Mon Jul 09, 2018 6:08 am
ThriftyPhD wrote:
Sun Jul 08, 2018 6:18 pm
Call_Me_Op wrote:
Sun Jul 08, 2018 5:38 pm
Nobody has ever claimed that SCV will beat S&P 500 over every time period.
Well, you did.
Untrue. Please identify where I said that.
I've quoted it twice so far; it's what I was responding to in the first place. Third time's the charm.
Call_Me_Op wrote:
Sun Jul 08, 2018 4:35 pm
First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods).
You're saying that it's wrong that SCV has under-performed the S&P 500 over long time periods. I identified one. So there are some long time periods where SCV under-performed the S&P 500.

Later, you state that nobody has every claimed that SCV will beat S&P 500 over every time period. But that's exactly what you're claiming if you say that it's 'flat-out wrong' that SCV has under-performed the S&P 500 over long time periods. And again, I identified one such long time period where it did under-perform.

Unless I'm misunderstanding your original statement. Perhaps you meant:
First, the assertion that SCV has under-performed the S&P500 over EVERY long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods).
If that's what you meant, then I agree. There are long time periods where SCV > SP500. But then I disagree that anyone asserted that SP500 will always beat SCV. Instead, I read your comment as:
First, the assertion that SCV has under-performed the S&P500 over ANY long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods).
This is more in line with what I think most people assert. That there are some periods where SCV will out-perform, others were SP500 will out-perform, and that the risk premium, if it exists, may not manifest over your investment time. At least not enough to compensate for the greatly increased volatility.

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by Call_Me_Op » Mon Jul 09, 2018 6:42 am

Thrifty,

Let me repeat my original words, and then explain them - since you are not representing them accurately.

"First, the assertion that SCV has under-performed the S&P500 over long time periods is flat-out wrong. There is a small cap premium and a value premium, and these are persistent and pervasive (over long time periods)."

The first sentence essentially asserts that if we take a series of (rolling) 40 year periods (for example), SCV will beat S&P500 in most of them. In fact, SCV wins in almost all of them - and by a large margin.

The second sentence is simply a statement that the SCV premium has held up over time and over geographical regions.

You are welcome to avoid tilting to SCV. Nobody is trying to convince you to do so. But please see the earlier post in this thread that compares SCV to large-cap blend from 1972-2018. The outperformance of SCV has been stunning.
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by nisiprius » Mon Jul 09, 2018 8:14 am

1) I don't use tilts or factors personally.

2) The the Bogleheads investment philosophy isn't sacred, but it's pretty good. So, let's look at the ten points with regard to a small-cap value tilt.

1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course

A small-cap value tilt doesn't conflict with 1, 2, 5, 6, 7, probably not 8, or 10. On #6, "when possible" allows enough wiggle room when the seemingly best tool for the job isn't strictly an index fund. On #7, costs of various factor funds and ETFs are not extreme rock-bottom, but they are "low" (e.g. by Morningstar's standards). On #10, it's at least as important to stay the course with tilts and factors as with total market portfolios). That leaves us with 3, 4, and 9 to look at.

With regard to 3, "never bear too much or too little risk," portfolio tilts are not really a "risk" decision. They add a negligible amount of risk, if any. For example, if we start with 60/40 Total Stock/Total Bond, and replace a third of the stock with a small-cap value fund, the standard deviation and other risk measures increase, but are still lower than for 65/35 Total Stock/Total Bond. It's also claimed (e.g. in discussing the "Larry Portfolio") that replacing a traditional stock allocation with a smaller allocation to small-cap value can lower tail risk (because if stocks in general go almost to zero, a smaller allocation going to zero does less damage than a larger one). So, no risk issue.

With regard to 4, "Diversify," it depends on the meaning of "diversification," but in any case, a small-cap value tilt either creates a portfolio with slightly less diversification (if you regard the market portfolio as maximum diversification), or slightly more diversification (tilters and factor advocates always say so, so in their own view they are complying). In any case, "diversify" doesn't mean some exact theoretical optimum. It just means not settling for Jim Cramer's "five stocks can be diversified enough," or investing half your 401(k) in company stock, or committing a huge part of your portfolio to some hot sector tech or healthcare or consumer staples (is that currently still trendy or is the fashion over?)

We're left with "invest with simplicity" and, of course this is relative. Simplicity is in the eye of the beholder. John C. Bogle once wrote "There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund." OK. Does changing the allocations from 50/50 add complexity? Hardly. How about adding an international stock fund, as Taylor Larimore does in the three-fund portfolio? What about adding just one more, for a small-cap value tilt? Is Bill Schultheis' "Coffeehouse Portfolio" simple or complicated (seven funds: total bond, large blend, large value, small blend, small value, international, REIT?) None of these comes close to the crazy complexity of (e.g.) the twenty-plus-fund portfolio in the Fidelity Freedom series, or many of the portfolios people have posted that advisors have gotten them into.

In short, I don't think that "the Bogleheads' investment philosophy" = " the three-fund portfolio and nothing else."
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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by staythecourse » Mon Jul 09, 2018 8:51 am

nisiprius wrote:
Mon Jul 09, 2018 8:14 am
In short, I don't think that "the Bogleheads' investment philosophy" = " the three-fund portfolio and nothing else."
Nisi, Excellent post as usual.

For the less experienced investor please do NOT confuse being a boglehead with being a ?Taylor-head. Taylor deserves all the kudos in the world, but the 3 fund has NOTHING to do with being a boglehead or even a 2 fund or even a 1 fund.

The principles of bogleheads as Nisi points are are simple rules and have NO mention on specific asset allocations. The most important for any asset allocation discussion is the implication for no. 10. Pick an asset allocation that you will "stay the course". Do not enter factor investing if you are not confident you will stick with it. Do not enter TSM/ TISM/ TBM if you are not confident you will stick with it.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by dcabler » Mon Jul 09, 2018 9:32 am

nisiprius wrote:
Mon Jul 09, 2018 8:14 am
1) I don't use tilts or factors personally.

2) The the Bogleheads investment philosophy isn't sacred, but it's pretty good. So, let's look at the ten points with regard to a small-cap value tilt.

1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course

A small-cap value tilt doesn't conflict with 1, 2, 5, 6, 7, probably not 8, or 10. On #6, "when possible" allows enough wiggle room when the seemingly best tool for the job isn't strictly an index fund. On #7, costs of various factor funds and ETFs are not extreme rock-bottom, but they are "low" (e.g. by Morningstar's standards). On #10, it's at least as important to stay the course with tilts and factors as with total market portfolios). That leaves us with 3, 4, and 9 to look at.

With regard to 3, "never bear too much or too little risk," portfolio tilts are not really a "risk" decision. They add a negligible amount of risk, if any. For example, if we start with 60/40 Total Stock/Total Bond, and replace a third of the stock with a small-cap value fund, the standard deviation and other risk measures increase, but are still lower than for 65/35 Total Stock/Total Bond. It's also claimed (e.g. in discussing the "Larry Portfolio") that replacing a traditional stock allocation with a smaller allocation to small-cap value can lower tail risk (because if stocks in general go almost to zero, a smaller allocation going to zero does less damage than a larger one). So, no risk issue.

With regard to 4, "Diversify," it depends on the meaning of "diversification," but in any case, a small-cap value tilt either creates a portfolio with slightly less diversification (if you regard the market portfolio as maximum diversification), or slightly more diversification (tilters and factor advocates always say so, so in their own view they are complying). In any case, "diversify" doesn't mean some exact theoretical optimum. It just means not settling for Jim Cramer's "five stocks can be diversified enough," or investing half your 401(k) in company stock, or committing a huge part of your portfolio to some hot sector tech or healthcare or consumer staples (is that currently still trendy or is the fashion over?)

We're left with "invest with simplicity" and, of course this is relative. Simplicity is in the eye of the beholder. John C. Bogle once wrote "There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund." OK. Does changing the allocations from 50/50 add complexity? Hardly. How about adding an international stock fund, as Taylor Larimore does in the three-fund portfolio? What about adding just one more, for a small-cap value tilt? Is Bill Schultheis' "Coffeehouse Portfolio" simple or complicated (seven funds: total bond, large blend, large value, small blend, small value, international, REIT?) None of these comes close to the crazy complexity of (e.g.) the twenty-plus-fund portfolio in the Fidelity Freedom series, or many of the portfolios people have posted that advisors have gotten them into.

In short, I don't think that "the Bogleheads' investment philosophy" = " the three-fund portfolio and nothing else."
Agree on all points! At the end of the day, you do what makes you comfortable, not the folks here on BH. And there are an infinite number of grey shades between the 3 fund portfolio (no size/value tilting) and, say, the Larry Portfolio (fully SCV) when it comes to tilting. And in my opinion, the only truly wrong answer is to constantly change your mind and move back and forth between the extremes.

Nthomas
Posts: 109
Joined: Fri Jul 15, 2016 8:46 am

Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by Nthomas » Mon Jul 09, 2018 9:36 am

nisiprius wrote:
Mon Jul 09, 2018 8:14 am
1) I don't use tilts or factors personally.

2) The the Bogleheads investment philosophy isn't sacred, but it's pretty good. So, let's look at the ten points with regard to a small-cap value tilt.

1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course

A small-cap value tilt doesn't conflict with 1, 2, 5, 6, 7, probably not 8, or 10. On #6, "when possible" allows enough wiggle room when the seemingly best tool for the job isn't strictly an index fund. On #7, costs of various factor funds and ETFs are not extreme rock-bottom, but they are "low" (e.g. by Morningstar's standards). On #10, it's at least as important to stay the course with tilts and factors as with total market portfolios). That leaves us with 3, 4, and 9 to look at.

With regard to 3, "never bear too much or too little risk," portfolio tilts are not really a "risk" decision. They add a negligible amount of risk, if any. For example, if we start with 60/40 Total Stock/Total Bond, and replace a third of the stock with a small-cap value fund, the standard deviation and other risk measures increase, but are still lower than for 65/35 Total Stock/Total Bond. It's also claimed (e.g. in discussing the "Larry Portfolio") that replacing a traditional stock allocation with a smaller allocation to small-cap value can lower tail risk (because if stocks in general go almost to zero, a smaller allocation going to zero does less damage than a larger one). So, no risk issue.

With regard to 4, "Diversify," it depends on the meaning of "diversification," but in any case, a small-cap value tilt either creates a portfolio with slightly less diversification (if you regard the market portfolio as maximum diversification), or slightly more diversification (tilters and factor advocates always say so, so in their own view they are complying). In any case, "diversify" doesn't mean some exact theoretical optimum. It just means not settling for Jim Cramer's "five stocks can be diversified enough," or investing half your 401(k) in company stock, or committing a huge part of your portfolio to some hot sector tech or healthcare or consumer staples (is that currently still trendy or is the fashion over?)

We're left with "invest with simplicity" and, of course this is relative. Simplicity is in the eye of the beholder. John C. Bogle once wrote "There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund." OK. Does changing the allocations from 50/50 add complexity? Hardly. How about adding an international stock fund, as Taylor Larimore does in the three-fund portfolio? What about adding just one more, for a small-cap value tilt? Is Bill Schultheis' "Coffeehouse Portfolio" simple or complicated (seven funds: total bond, large blend, large value, small blend, small value, international, REIT?) None of these comes close to the crazy complexity of (e.g.) the twenty-plus-fund portfolio in the Fidelity Freedom series, or many of the portfolios people have posted that advisors have gotten them into.

In short, I don't think that "the Bogleheads' investment philosophy" = " the three-fund portfolio and nothing else."
Well-written and totally agree. things can get a little dogmatic at times.

MJW
Posts: 507
Joined: Sun Jul 03, 2016 7:40 pm
Location: Pacific Northwest

Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by MJW » Mon Jul 09, 2018 10:54 am

I find it a little irritating whenever someone purports to be an authority on what constitutes a "real" Boglehead. The ten concepts listed in the Boglehead philosophy provide a reasonable framework for shared ideals without veering into militant thinking. Any dogma beyond the philosophy is ascribed rather than implied. But alas, that is what people do.

I also agree with the point a poster made above about conflating the notion of a Boglehead with religious adherence to the Three Fund Portfolio. It's one example of the philosophy in action -- albeit a good one, but not the only one. It would be unfortunate if the tone around here is such that new people following the forum casually would have any other takeaway.

mickens16
Posts: 328
Joined: Wed Apr 06, 2011 8:52 am

Re: Is it contradictory to be a Boglehead and have substantial allocation towards SCV?

Post by mickens16 » Mon Jul 09, 2018 11:16 am

staythecourse wrote:
Mon Jul 09, 2018 8:51 am
nisiprius wrote:
Mon Jul 09, 2018 8:14 am
In short, I don't think that "the Bogleheads' investment philosophy" = " the three-fund portfolio and nothing else."
Nisi, Excellent post as usual.

For the less experienced investor please do NOT confuse being a boglehead with being a ?Taylor-head. Taylor deserves all the kudos in the world, but the 3 fund has NOTHING to do with being a boglehead or even a 2 fund or even a 1 fund.

The principles of bogleheads as Nisi points are are simple rules and have NO mention on specific asset allocations. The most important for any asset allocation discussion is the implication for no. 10. Pick an asset allocation that you will "stay the course". Do not enter factor investing if you are not confident you will stick with it. Do not enter TSM/ TISM/ TBM if you are not confident you will stick with it.

Good luck.
If I were new to this forum I would certainly believe that to be a true boglehead you would need to invest like a Taylor-head. Many posters that do not invest in the 3fund portfolio have left or do not post on this forum any longer. Whenever a non 3 fund poster asks questions they are inundated or ridiculed because they don’t invest like a Taylor-head. I for one believe that there really are several roads to Dublin and mean it.

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