Talk:Vanguard small cap funds FAQ

Hi all,

I'm starting a FAQ page on small cap funds, but I'll have to break for now. I hope I'm doing it correctly and would appreciate any input. I noticed that my questions are coming out in bold type. I tried to copy FAQ from International funds where the questions are not in bold. Why am I getting bold print?

Some additional questions I thought of including:

How tax efficient are these funds?

Which funds can I hold in taxable?

What are expected returns of the different small cap funds?

How much do I overweight if I want to tilt?

I have to break for awhile and I saved the page, so I guess it's there but incomplete. Is there a way to save without actually publishing? Paul 14 March 2010 (UTC)


 * Paul, there is nothing wrong with your formatting. The bold print is due to your placing the questions in subheaders. This allows the questions to become organized in the automated table of contents. We can place this page in the development category if you want it to be considered a work-in-progress, but this in not essential. Undeveloped pages are known as "stub" pages in wiki parlance, and simply await development. I have pm'd a host of wiki editors to help collaborate on this page. I suggested some questions along the lines of the ones you have suggested above:


 * We might want to touch on the theoretical reasons for tilting to small cap/ small cap value allocations (Fama French). We have wiki links for Fama French and value tilting.


 * We might want to discuss retirement plan offerings (which often only include one reasonable stock fund, an S&P 500 fund) so that an investor wishing to invest in the total market would need to add additional funds to the portfolio. We have wiki links for approximating total market indexing.


 * We might want to talk about asset location. Should one prefer the tax-managed fund or the small cap index funds for taxable investing?


 * Tax loss harvesting?


 * Funds vs. ETF's?


 * What about international small caps?--Blbarnitz 18:22, 14 March 2010 (UTC)

--- Barry - Since you gave me the link I thought I would try putting in the items I PM you just to get a little familiarity with the process. Thanks. Randy

---

Under discussion of small cap foreign, might want to include something about Foreign Tax credit or link to appropriate comments in general foreign investment section.

This is from my reading of the board and would need to be researched, but to expand on your "Funds vs ETF's" item, it would be pertinent to point out that there are few low cost non-ETF index fund options available in the international small cap area.

Some points related to the high costs of investing in international small caps (not the high costs of active funds, but the costs of actually buying the stocks). Particularly as related to Vanguard's fund/ETF as it includes Emerging Markets which have additional funds. I think many beginners are losing track of the advantages of some assets because of some minor costs as pointed out by Landy:

"Are you saying that you are missing an important asset class in your portfolio - especially Foreign Small Caps which can be very costly - because a $1,000 investment has a $7.5 fee that goes back to the fund?

Say it isn't so!... this is losing the forest for the trees or penny wise, pound foolish."

in this recent conversation: http://www.bogleheads.org/forum/viewtopic.php?t=51837

Depending upon how far Paul wants to go with things, he might also one to point out some of the problems with historical returns in the U.S. small cap growth area. I do not know how well that carries to the international, but I vaguely remember someone saying it did. (Edit from what I PM'ed - in other words, that value tilting has an advantage in international small cap as it does in U.S.) -- I'll plug away on some Q and A in the next few days as time permits, but if anyone wants to jump in with a contribution, that would be great.

Paul

I'd like to help, but it won't be for a while. I'm working on the new Comparing Investments page.

A few pointers on wiki editing: Take a look at the NEW WIKI TOOLBAR NOW AVAILABLE sticky in the forum. The short answer: Select the text and hold your cursor over the toolbar button, help will appear (tooltip). If you don't select any text and click on the button, an example will be put in its place.

Here are the Fama and French Three-Factor Model and Value Tilting - Stock pages.

I'm always available if you need assistance with the wiki formatting. Just let me know. --LadyGeek 22:16, 14 March 2010 (UTC)

I'll pitch in some here and there, an idea I have is to add the Russell 2000 and the arbitrage issues, Vanguard doesn't use it but it is available in a lot of company plans, but I am not an expert. Mikep 23:21, 14 March 2010 (UTC)


 * I have made a start at filling in some of the questions. I have also added verifying data, as well as providing internal wiki links. --Blbarnitz 17:02, 15 March 2010 (UTC)

The talk page for Value Tilting - Stock had the forum thread which was the basis for this page (topic page updated with link).
 * value tilting: the numbers, started by pkcrafter

That should help answer the FAQ question on tilt. I need to focus on Comparing Investments for now. If it goes unanswered, I can take a crack at it. --LadyGeek 20:51, 15 March 2010 (UTC)

Value Tilt
I can't find the references for this paragraph: What does "tilting" to small mean and how much should I tilt? Financial experts [need citation] often recommend that investors should use index mutual funds to invest in entire markets, or, invest in funds that approximate the total market. Other portfolio theorists advise holding portfolios that tilt toward small and value stocks. [need citation] I created the page from this thread value tilting: the numbers. I thought that this statement was OK, since it got reviewed by members in that thread. If this is an oversight, please suggestion a correction.

I'll go back and update Value Tilting - Stock to match this page after it's fixed. --LadyGeek 14:41, 19 March 2010 (UTC)

I did more research to find a citation for holding portfolios with a small cap tilt. "Financial experts[reference to the Telltale Chart] often recommend that investors should use index mutual funds to invest in entire markets, or, invest in funds that approximate the total market. Other portfolio theorists advise holding portfolios that tilt toward small and value stocks. [need citation]"

Investopedia (Achieving Better Returns In Your Portfolio) claims that small cap and value are good investments. However... Refers to Fama and French for small and growth outperforming the market, but then follows into a lot of subtle statements about cap weighting and indexing.
 * Fundamentalists at the Gates: The Trouble With Cap-Weighted Indexes (Seeking Alpha)
 * Reflections on Money Management: Of Risk Premium Collection, Patience, and Spreading Your Bets (Bill Bernstein) 3rd paragraph from the bottom

I gather that tilting was working for a while, but it's not so clear now. This is out of my area. I'd rather have someone with more experience update this sentence. Thanks. --LadyGeek 01:50, 24 March 2010 (UTC)
 * Lady Geek, you might have some success looking over the articles linked over at Dimensional Fund Advisors for solid references. --Blbarnitz 05:14, 24 March 2010 (UTC)

Thanks. I found those articles you cited on the page and a few more. This article does indeed suggest to hold a tilt of small cap and value stocks. It then goes on to imply that operating costs for small cap stocks are relatively high compared to large caps. Their Core Equity funds are designed to minimize costs for tilted portfolios. Contains a discussion of separating the risks of small stocks vs. the combined market (John Bogle's approach does not consider small stocks to be a separate risk). The article concludes that gaining exposure to small caps are fine as long as they are index funds and not timed to predict markets. "Some investors argue that small cap stocks are priced in a less efficient manner than large cap stocks, so that small cap pricing errors can more readily be exploited. This implies that there should be evidence of positive persistence among the small cap portfolio managers who are the best at exploiting valuation errors. However, the results of Davis (2001) and Quigley and Sinquefield (2000) reveal no evidence of reliable positive persistence among small cap managers. Small cap stocks do not appear to offer greater promise of positive abnormal returns."
 * The Dimensions of Stock Returns: 2007
 * The New Indexing
 * The Informational Efficiency of Stock Prices: A Review
 * FAQ ...Why not put 100% of the equity allocation in value stocks?
 * ...To the extent an investor is likely to be disappointed with performance that differs from a market portfolio, a tilt toward value stocks should be undertaken cautiously!

As a novice investor reading the above, I come to a conclusion that says if you tilt towards small cap, then it should be a small cap index fund (the intent of the FAQ). Perhaps there should be a caveat similar to Value Tilting - Stock: Caveat: The concept of portfolio value tilting is intended for advanced investors only. Not recommended for new investors, as it intentionally deviates from investing in the total market- a Bogleheads' approach to managing your portfolio.

It's stated in the quote box, but maybe it should be more visible.--LadyGeek 00:57, 25 March 2010 (UTC)