Would initially splitting a U.S. large-cap stock index fund like VV into its value and growth components, 50% VTV and 50% VUG, reduce sequence of returns risk for a retiree?
Year to date, the value index fund VTV has returned about -4%. In contrast, the growth index fund VUG has returned about -22%. My vague idea is that a retiree might be able to reduce their sequence of returns risk by (1) making withdrawals from whichever fund has performed better recently and (2) not otherwise rebalancing. I would imagine that over the course of time, value and growth components of the stock market perform differently but eventually revert to the mean. Additionally, by starting with 50% VTV and 50% VUG, one wouldn't stray too far from market-cap weighting the U.S. stock market.
I would just like some clarification on whether this idea makes sense or not. Thanks!
Would splitting U.S. large cap into value and growth reduce risk?
Would splitting U.S. large cap into value and growth reduce risk?
Last edited by LeoB on Fri May 13, 2022 6:27 pm, edited 1 time in total.
Re: Would splitting U.S. large cap into value and growth reduce risk?
No. Lc = value + growth.
I am trying to think of a good answer to your simple question, but it is almost too simple. These are the hardest to answer.
I am trying to think of a good answer to your simple question, but it is almost too simple. These are the hardest to answer.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Hyperchicken
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Re: Would splitting U.S. large cap into value and growth reduce risk?
It may however present extra opportunities for TLH.
Re: Would splitting U.S. large cap into value and growth reduce risk?
No, but if you put the Growth piece in taxable and the Value piece in tax-advantaged, you would reduce taxes.
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burritoLover
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Re: Would splitting U.S. large cap into value and growth reduce risk?
That would give you a value tilt over a blended fund like the S&P 500 as the growth names dominate the index currently - even after their recent downfall. Some have argued that a value tilt would increase diversification but I would personally just do the large blend and then add the specific value tilt you want separately via a value ETF. I think a small value tilt would offer more diversification.
YTD returns are meaningless for portfolio construction, let alone 10, 20, 30 years.
EDIT: actually looking at it, it would be virtually the same as the S&P 500 currently (very slightly tilted more to value relative to S&P 500 alone) - oh the mighty growth has fallen enough recently.
YTD returns are meaningless for portfolio construction, let alone 10, 20, 30 years.
EDIT: actually looking at it, it would be virtually the same as the S&P 500 currently (very slightly tilted more to value relative to S&P 500 alone) - oh the mighty growth has fallen enough recently.
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secondopinion
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Re: Would splitting U.S. large cap into value and growth reduce risk?
Right. This is probably the best reason to split the two. However, I certainly do not have enough room to do everything that is not tax-efficient in my IRA.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Would splitting U.S. large cap into value and growth reduce risk?
OP,
If you believe that this strategy would work, then, the logical conclusion would be
Larry portfolio.
A) 50% SmallCapValue -> Most Risky
B) 50% Intermediate Term Treasury -> Most Safe
And, use the volatility to your advantage.
https://www.investopedia.com/articles/i ... rategy.asp
https://www.amazon.com/Reducing-Risk-Bl ... 074X&psc=1
KlangFool
If you believe that this strategy would work, then, the logical conclusion would be
Larry portfolio.
A) 50% SmallCapValue -> Most Risky
B) 50% Intermediate Term Treasury -> Most Safe
And, use the volatility to your advantage.
https://www.investopedia.com/articles/i ... rategy.asp
https://www.amazon.com/Reducing-Risk-Bl ... 074X&psc=1
KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
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nisiprius
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Re: Would splitting U.S. large cap into value and growth reduce risk?
One way to answer this is pragmatically. It will take you about fifteen minutes to get the hang of PortfolioVisualizer's "Portfolio backtest" tool (click on the "source" link below).
It is my personal belief that past performance does not predict future performance, but that past similarity does, in fact, predict future similarity.
How are you going to judge risk? Since sequence-of-return risk involves sensitivity to portfolio drawdowns occurring in the vicinity of retirement age, "max drawdown" seems relevant.
The blue curve is VV.
The red curve is a 50/50 portfolio of VUG and VTV, rebalanced monthly.
The greatest dip was in 2008-2009, and it was
-50.39% for VV and
-50.56% for the fifty-fifty value/growth split.
My judgement is "50/50 VUG/VTV would not have reduced risk over this time period."
In fact, "50/50 VUG/VTV equals VV--as near as makes no difference."
But if you determined to see a difference, no matter how microscopic, it was actually in the wrong direction--VUG/VTV declined just a hair more than VV.
Source
It is my personal belief that past performance does not predict future performance, but that past similarity does, in fact, predict future similarity.
How are you going to judge risk? Since sequence-of-return risk involves sensitivity to portfolio drawdowns occurring in the vicinity of retirement age, "max drawdown" seems relevant.
The blue curve is VV.
The red curve is a 50/50 portfolio of VUG and VTV, rebalanced monthly.
The greatest dip was in 2008-2009, and it was
-50.39% for VV and
-50.56% for the fifty-fifty value/growth split.
My judgement is "50/50 VUG/VTV would not have reduced risk over this time period."
In fact, "50/50 VUG/VTV equals VV--as near as makes no difference."
But if you determined to see a difference, no matter how microscopic, it was actually in the wrong direction--VUG/VTV declined just a hair more than VV.
Source
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Would splitting U.S. large cap into value and growth reduce risk?
Thanks for pointing out Portfolio Visualizer and posting those back test results. That is very helpful. Based on your example, there appears to be no significant difference in maximum drawdown.
However, I am not sure if your posted example is the situation I was envisioning. For example, consider this Portfolio Visualizer graph.
It appears that value outperformed growth between 2005-2008. What if a retiree took distributions from the value ETF (VTV) during this time period rather than from the growth ETF (VUG)?
Alternatively, from 2009-present, it appears that growth has outpaced value. What if a retiree took distributions from VUG during this time frame rather than from VTV?
Let's say someone started with a 50/50 portfolio of VTV and VUG, and then followed a strategy like this. How would they have fared during the great recession and the most recent downturn? I suspect that the drawdowns would have been less than that of VV. However, I am not sure how to evaluate this using Portfolio Visualizer. Admittedly, I am a novice with the tool, so perhaps someone else knows the answer better than I do.
However, I am not sure if your posted example is the situation I was envisioning. For example, consider this Portfolio Visualizer graph.
It appears that value outperformed growth between 2005-2008. What if a retiree took distributions from the value ETF (VTV) during this time period rather than from the growth ETF (VUG)?
Alternatively, from 2009-present, it appears that growth has outpaced value. What if a retiree took distributions from VUG during this time frame rather than from VTV?
Let's say someone started with a 50/50 portfolio of VTV and VUG, and then followed a strategy like this. How would they have fared during the great recession and the most recent downturn? I suspect that the drawdowns would have been less than that of VV. However, I am not sure how to evaluate this using Portfolio Visualizer. Admittedly, I am a novice with the tool, so perhaps someone else knows the answer better than I do.
Last edited by LeoB on Fri May 13, 2022 5:29 pm, edited 1 time in total.
Re: Would splitting U.S. large cap into value and growth reduce risk?
If you keep the portfolio in balance it doesn't matter. If VTV is doing well, you should be selling VTV and buying VUG. And vice-versa. Whether you withdraw and then rebalance, or rebalance and then withdraw, the results will be the same.LeoB wrote: ↑Fri May 13, 2022 5:19 pm It appears that value outperformed growth between 2005-2008. What if a retiree took distributions from the value ETF (VTV) during this time period rather than from the growth ETF (VUG)?
Alternatively, from 2009-present, it appears that growth has outpaced value. What if a retiree took distributions from VUG during this time frame rather than from VTV?
If you don't care to keep the portfolio in balance and just let things ride, then withdrawing from the leading fund is also rebalancing, but maybe not a full rebalance every time.
Re: Would splitting U.S. large cap into value and growth reduce risk?
Not a simple question. OP is correct because they allow asset allocation to drift. (Ok, maybe 50/50 is not correct.) But we all do that unless we rebalance continuously. KlangFool's answer is most relevant consideration IMO. Lots of hairy conclusions follow from this premise.
Re: Would splitting U.S. large cap into value and growth reduce risk?
I guess I should have been more specific. Thanks for pointing this out! I’ve edited the original post accordingly.Corvidae wrote: ↑Fri May 13, 2022 5:29 pm Not a simple question. OP is correct because they allow asset allocation to drift. (Ok, maybe 50/50 is not correct.) But we all do that unless we rebalance continuously. KlangFool's answer is most relevant consideration IMO. Lots of hairy conclusions follow from this premise.
In this thought experiment, I am allowing for some asset drift between growth/value. Just the starting point is 50% value, 50% growth. As you mention, many people do not rebalance very regularly.
Re: Would splitting U.S. large cap into value and growth reduce risk?
https://archives.ust.hk/dspace/bitstrea ... -06-28.pdf
This white paper shows how different value investing strategies crushed buying the whole market during Japan's lost decades, which were triggered by historically high valuations.
This white paper shows how different value investing strategies crushed buying the whole market during Japan's lost decades, which were triggered by historically high valuations.