Is it foolish to go all in Small Cap Value?

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Morse Code
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Re: Is it foolish to go all in Small Cap Value?

Post by Morse Code »

Tom_T wrote: Thu Jan 27, 2022 10:59 am All I care about is a return that allows me to meet my goals. It's probably not going to be the "highest" return (which we can't even know because that requires a start date and an end date to measure, therefore it will flucutate with each passing year.) My opinion is that the way for me to increase my odds is to be diversified. I'm sure there will be other portfolios that outperform mine - and some that don't.
Right on. One other point, comparing personal returns to a benchmark also tends to focus an investor on short term results. When is that ever a good idea?
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Bluemnatra
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Re: Is it foolish to go all in Small Cap Value?

Post by Bluemnatra »

"The greatest enemy of a good plan is the dream of a perfect plan"
Nathan Drake
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Re: Is it foolish to go all in Small Cap Value?

Post by Nathan Drake »

Bluemnatra wrote: Thu Jan 27, 2022 11:19 pm Jack Bogle's take:

https://www.morningstar.com/articles/77 ... ght-course
He says “I could be wrong” and the “data is very compelling for SCV outperformance”

His take home is that many should stick with the market due to behavioral reasons. If you are not prone to behavioral mistakes and can stay the course, SCV can make sense
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Bluemnatra
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Re: Is it foolish to go all in Small Cap Value?

Post by Bluemnatra »

Nathan Drake wrote: Thu Jan 27, 2022 11:51 pm
Bluemnatra wrote: Thu Jan 27, 2022 11:19 pm Jack Bogle's take:

https://www.morningstar.com/articles/77 ... ght-course
He says “I could be wrong” and the “data is very compelling for SCV outperformance”

His take home is that many should stick with the market due to behavioral reasons. If you are not prone to behavioral mistakes and can stay the course, SCV can make sense
And his paper he references in the video:

http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
"The greatest enemy of a good plan is the dream of a perfect plan"
Nathan Drake
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Re: Is it foolish to go all in Small Cap Value?

Post by Nathan Drake »

Bluemnatra wrote: Fri Jan 28, 2022 12:14 am
Nathan Drake wrote: Thu Jan 27, 2022 11:51 pm
Bluemnatra wrote: Thu Jan 27, 2022 11:19 pm Jack Bogle's take:

https://www.morningstar.com/articles/77 ... ght-course
He says “I could be wrong” and the “data is very compelling for SCV outperformance”

His take home is that many should stick with the market due to behavioral reasons. If you are not prone to behavioral mistakes and can stay the course, SCV can make sense
And his paper he references in the video:

http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf

Ahh yes the tell tale chart

Image
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
bluewalls
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Re: Is it foolish to go all in Small Cap Value?

Post by bluewalls »

I think it is reasonable. I’ve only been investing for a few years now, and I only have about 30k. My portfolio looks like this:

50% AVUV
40% AVDV
10% DGS

I’m perfectly prepared for a 70% drop in value in the event of a crash. [Expletive removed by admin LadyGeek]. So far, it has outperformed total stocks for me.
enad
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Re: Is it foolish to go all in Small Cap Value?

Post by enad »

Read this speech that John Bogle gave titled The Telltale Chart in which Bogle talks about the Six Manifestations of RTM (Return To Mean)
Kbg
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Re: Is it foolish to go all in Small Cap Value?

Post by Kbg »

I've barbelled it in one retirement account. The stock allocation of a 70/30 is 35% each to QQQM and AVUV.

If one substitutes IJS for AVUV and QQQ for QQQM you can take a backtest all the way back to 2000. Of course history will not repeat, but we have gone through some crazy stuff including the early 2000s Nasdaq implosion and this mix has done a wee tad better than the S&P500 (+1.3% CAGR) with a slightly improved Sharpe.

I hope the folks at Advantis can keep it up...they've definitely added investment management value in the small cap value space.
garlandwhizzer
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Re: Is it foolish to go all in Small Cap Value?

Post by garlandwhizzer »

Back to the original topic: Is it foolish to go all in (presumably 100%) in SCV (which is a 3% slice of the market)? Foolish is in the eye of the beholder, but for me, it does seem foolish. IMO, it puts too much faith on data-mined factor theory as an oracle of which slice of the market will ultimately outperform. Factor theory is intellectually interesting and rigorous, but SCV funds have in failed to outperform one factor beta (TSM) over the last 20 years. In fact the opposite has happened, significant underperformance. When reality departs for 2 decades from what a theory predicts, something needs to be questioned. Perhaps it's time to question the theory as a source of the illusive secret investing sauce rather than to claim that what has actually happened for 20 years is an aberration. Fama, one of the brilliant fathers of S and V and a very honest man, has admitted that he has been surprised by the persistent dominance of LCG in the US market since 2006. Perhaps surprises will continue. Or, perhaps not, and SCV will come roaring back. Opinions vary.

The truth is that no one knows with reliable certainty. All we have is opinions. Social science theory is not like laws of physics that have reliable prediction power at all times. If you want to massively overweight SCV to maximize expected long term returns, I wish you luck as I do for all investors. I choose not to do that, 25% SCV for me. I hold it not because I believe SCV will end up outperforming going forward but as diversification to 75% TSM which is heavily exposed to expensive mega cap tech growth stocks. There are definite risks when LCG valuations hugely exceed how future profits will really play out. I do not believe at this time that a crash like 2000 is inevitable. 2000 was a house of cards. Today's winners are quality stocks with substantial cash and profit streams. They are simply overvalued relative to the rest of the market. We could get a reversal of market leadership at some point in the future and it may be before long. When it will happen, how long that it will last and high massive it will be when it finally does happen are, again, totally unknown. SCV has already done a couple of brief outperformance head fakes. Very challenging to tell the head fake from the real thing. If it happens, I'm ready with substantial SCV. If it doesn't, I'm also ready with 75% TSM.

Garland Whizzer
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KEotSK66
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Re: Is it foolish to go all in Small Cap Value?

Post by KEotSK66 »

2 things...

1) Are you really qualified to do this, was your research thorough?

2) Check the criteria used to filter companies to make sure they're not simplistic.

A good actively managed fund addresses both.

Good Luck.
"I just got fluctuated out of $1,500.", Jerry🗽
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grap0013
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Re: Is it foolish to go all in Small Cap Value?

Post by grap0013 »

Haven't owned a large US or large ex-US dev stock since 2010.

~27 year trailing returns: https://testfol.io/?s=fu6lflD8lh8

Global SCV: +9.69%
S&P 500: +8.41%

20 year trailing returns: https://testfol.io/?s=36pUgSGWk83

Global SCV: +7.29%
S&P 500: +10.51%

15 year trailing returns: https://testfol.io/?s=hUeAftoobLx

Global SCV: +7.64%
S&P 500: +13.69%

10 year trailing returns: https://testfol.io/?s=i2aplEGkThG

Global SCV: +10.65%
S&P 500: +15.37%

5 year trailing returns: https://testfol.io/?s=3K3aMeFRNK6

Global SCV: +11.54%
S&P 500: +14.11%


Tracking error is biggest risk. Global SCV produced good real returns independent of whatever the S&P500 was doing. The best asset allocation is the one you can stick with. I think best for most folks is VT + bond fund or a target retirement fund. Good to listen to others advice but if you like your asset allocation no need to switch based on what someone on the internet is saying.
There are no guarantees, only probabilities.
Park
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Re: Is it foolish to go all in Small Cap Value?

Post by Park »

https://www.morningstar.com/funds/best-small-cap-etfs

"Small companies are risky in part because they don’t usually possess the same competitive advantages as larger firms. Only 2% of companies in the small-cap index boast a wide Morningstar Economic Moat Rating, compared with 76% of firms in the large-cap index. The financial performance of wide-moat companies is usually more stable and predictable than for narrow- or no-moat companies, helping the large-cap index to about one third less annualized volatility than the small-cap index over the past two decades"

There is risk in small cap stocks. If markets are efficient, then that risk should be compensated for. I'm talking about small cap stocks, and not small cap value. For whatever reason though, small cap growth stocks (the "black hole" of investing) have gotten less of a risk premium than one might expect. I think you can make the case that small cap value stocks historically have gotten a risk premium, for being small cap stocks.
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