Simplicity over Small Cap Value

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Leif
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Re: Simplicity over Small Cap Value

Post by Leif »

If you are interested in SCV, and it seems you are, you can listen to this recent Morningstar podcast.

Paul Merriman: ‘This Is Not Just a Problem with Retail Amateur Investors’

Why not have both? Paul suggests one option is to have 2 fund portfolio. A target date fund and a SCV fund.

To me simplicity is way over hyped on this forum. I like to have options but avoid duplicate holdings by equity size/style. Some fall into the trap of adding a new fund as they get new money using the hot fund at the moment. They end up with near duplicates. In those cases simplicity can be applied.
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Re: Simplicity over Small Cap Value

Post by cegibbs »

anon_investor wrote: Wed Apr 07, 2021 2:02 pm
investingforbank wrote: Wed Apr 07, 2021 1:51 pm Hey guys. I recently posted a portfolio that tilts to SCV. I am now rethinking if I am being too complicated and should just stick to total market and total international index funds. I am 18 years old. Should I go with the simplicity or tilt to small cap value? How much extra would I reasonably earn if I did the 25% tilt to SCV? Thanks
I would vote for simplicity.

+1 Wholeheartedly agree. There are so many advantages to going the route of simplicity.
gideon trumpet
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Re: Simplicity over Small Cap Value

Post by gideon trumpet »

Simplicity. If you have a high savings rate from a young age, you'll never miss a factor fund or any other "style" mix.
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Taylor Larimore
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Simplicity over Small Cap Value ?

Post by Taylor Larimore »

Leif wrote: To me, simplicity is way over hyped on this forum.
Leif:

It is difficult to "over hype" the benefits of Simplicity. This is what experts say:

What Experts Say About Simplicity.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Simplicity is the master key to financial success. -- We ignore the real diamonds of simplicity, seeking instead the illusory rhinestones of complexity."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Simplicity over Small Cap Value

Post by placeholder »

How can there be much benefit to the simplicity of eliminating ONE fund?
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Re: Simplicity over Small Cap Value

Post by Outer Marker »

placeholder wrote: Fri Apr 09, 2021 7:10 pm How can there be much benefit to the simplicity of eliminating ONE fund?
A lot. Are you going to be anxious about this under or over performing the market. Not to mention the annual rebalancing and accounting. Which is admittedly not a big deal if you’re committed to it, but unnecessary if you’re not.
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permport
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Re: Simplicity over Small Cap Value

Post by permport »

It's funny how behavioral problems can manifest themselves so differently in different individuals.

For me, not tilting would engender more behavioral problems than tilting would. By tilting I don't have to be worried about which factor will perform the best. I own all of them.
Buy right and hold tight.
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Re: Simplicity over Small Cap Value

Post by stan1 »

I think the simplicity mantra is mostly a mental trick people use to keep themselves from tinkering (along with appeal to authority). I won't argue that a simple portfolio should help out a spouse who is not inclined to tinker.

Just saw OP is 18 years old. To be honest I'd go with Total World and leave it at that for the time being. Focus on education and building earning potential.
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Re: Simplicity over Small Cap Value

Post by placeholder »

Outer Marker wrote: Fri Apr 09, 2021 7:23 pm
placeholder wrote: Fri Apr 09, 2021 7:10 pm How can there be much benefit to the simplicity of eliminating ONE fund?
A lot. Are you going to be anxious about this under or over performing the market. Not to mention the annual rebalancing and accounting. Which is admittedly not a big deal if you’re committed to it, but unnecessary if you’re not.
You're throwing in things that have nothing to do with managing the account so add "if you are able to maintain your desired allocation" to that and rebalancing is pretty simple by using new contributions to go into lagging sub allocations.
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Re: Simplicity over Small Cap Value

Post by drk »

placeholder wrote: Fri Apr 09, 2021 7:10 pm How can there be much benefit to the simplicity of eliminating ONE fund?
It depends on the individual. The OP tends towards anxiety and overthinking, which is borne out by the flurry of posts asking for portfolio advice. In this case, getting started at 18 with an extremely simple one-fund portfolio hopefully establishes positive behaviors, while adding a second fund opens the door to tinkering.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
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Re: Simplicity over Small Cap Value

Post by placeholder »

drk wrote: Fri Apr 09, 2021 7:45 pm It depends on the individual. The OP tends towards anxiety and overthinking, which is borne out by the flurry of posts asking for portfolio advice. In this case, getting started at 18 with an extremely simple one-fund portfolio hopefully establishes positive behaviors, while adding a second fund opens the door to tinkering.
People who have anxiety will suffer regardless of number of allocations so I reject these so-called benefit for the normal investor and suggest that it won't matter for the anxious fringe.
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Re: Simplicity over Small Cap Value

Post by drk »

placeholder wrote: Fri Apr 09, 2021 7:48 pm People who have anxiety will suffer regardless of number of allocations so I reject these so-called benefit for the normal investor and suggest that it won't matter for the anxious fringe.
This begs the question. If you're not open to any answers, I don't understand why you asked the question in the first place. :beer
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
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Re: Simplicity over Small Cap Value

Post by bikechuck »

Triple digit golfer wrote: Wed Apr 07, 2021 8:30 pm
corp_sharecropper wrote: Wed Apr 07, 2021 8:18 pm I struggle with understanding what's so "complex" about a few extra tilts or slice 'n dices of low cost funds for such a capable bunch as found here on Bogleheads. Or what's so "hard" about something so "complex" as 5-10 funds vs 3 funds. I mean this place is full of PhDs, MDs, lawyers, professors, entrepreneurs, and various high level professionals that it just doesn't make sense to me that they can perform their day jobs but rebalancing >3 funds using a spreadsheet is.. just... too.. much. I get it for those that just want the smallest possible number, I don't get it for those that want more but just can't because it's somehow overwhelming. I'd appreciate some incite into this psychology, I'm being genuine, not trying to stir things up.
For me it's more about not having to make investment decisions or second guess myself. I also know that I do not know more than the market, so I can't justify any tilts. I have no good reason to overweight any particular size, style, or sector of stocks. I know that if I tilted and underperformed, I'd have regret. So I don't do it.
You could argue that if you invest only in a total market fund you are over weighting large cap stocks.
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Re: Simplicity over Small Cap Value

Post by Triple digit golfer »

bikechuck wrote: Fri Apr 09, 2021 7:59 pm
Triple digit golfer wrote: Wed Apr 07, 2021 8:30 pm
corp_sharecropper wrote: Wed Apr 07, 2021 8:18 pm I struggle with understanding what's so "complex" about a few extra tilts or slice 'n dices of low cost funds for such a capable bunch as found here on Bogleheads. Or what's so "hard" about something so "complex" as 5-10 funds vs 3 funds. I mean this place is full of PhDs, MDs, lawyers, professors, entrepreneurs, and various high level professionals that it just doesn't make sense to me that they can perform their day jobs but rebalancing >3 funds using a spreadsheet is.. just... too.. much. I get it for those that just want the smallest possible number, I don't get it for those that want more but just can't because it's somehow overwhelming. I'd appreciate some incite into this psychology, I'm being genuine, not trying to stir things up.
For me it's more about not having to make investment decisions or second guess myself. I also know that I do not know more than the market, so I can't justify any tilts. I have no good reason to overweight any particular size, style, or sector of stocks. I know that if I tilted and underperformed, I'd have regret. So I don't do it.
You could argue that if you invest only in a total market fund you are over weighting large cap stocks.
I could, but I'd be wrong. A total market index fund is neutral. By definition, it holds companies in their market weights.

If it is a preference not to do that, so be it. But a total market index fund does not over or under weight any size, style, or sector.
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Re: Simplicity over Small Cap Value

Post by palaheel »

You've got to convince yourself to tilt. Otherwise, don't do it. If in doubt, don't do it. If you're looking for approval, don't do it. If you can't handle significant periods of underperformance, don't do it.

That said, don't blame complexity for not tilting; the Trev H portfolio (which Merriman calls the World Wide 4-fund combo) is four funds and not complex. It mimics the performance of Merriman's 10-fund slice and dice very well.

Figure out where your conviction resides, and act accordingly.
Nothing to say, really.
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Re: Simplicity over Small Cap Value

Post by placeholder »

drk wrote: Fri Apr 09, 2021 7:53 pm
placeholder wrote: Fri Apr 09, 2021 7:48 pm People who have anxiety will suffer regardless of number of allocations so I reject these so-called benefit for the normal investor and suggest that it won't matter for the anxious fringe.
This begs the question. If you're not open to any answers, I don't understand why you asked the question in the first place. :beer
I'm open to answers that don't drag in irrelevant issues.
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Re: Simplicity over Small Cap Value

Post by abuss368 »

Simplicity can take on different meaning for different folks. Simplicity to me is owning one or a few total market index funds.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity over Small Cap Value

Post by bikechuck »

Triple digit golfer wrote: Fri Apr 09, 2021 8:12 pm
I could, but I'd be wrong. A total market index fund is neutral. By definition, it holds companies in their market weights.

If it is a preference not to do that, so be it. But a total market index fund does not over or under weight any size, style, or sector.
Thank you for sharing your point of view. The problem lies in the cap weighting as six mega stocks now dominate the S&P 500 and also represent a large percentage of total stock market index funds. This introduces risk, it has not always been that way and there is a sound logical argument for trying to mitigate that risk with adding a small cap fund so these mega corporations are not so over weighted.

I guess it comes down to whether or not you feel the dominant representation of this handful of mega stocks does or does not cause an overweighting of large cap. I think that it does, you think that it does not and there are good arguments on both sides.
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Re: Simplicity over Small Cap Value

Post by KyleAAA »

The notion that a small value tilt is somehow more complicated than a 3 find portfolio is clearly false. Both are trivial to maintain. There's no value in limiting yourself to 3 funds if you prefer 4. This is false simplicity.
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Re: Simplicity over Small Cap Value

Post by Outer Marker »

KyleAAA wrote: Sun Apr 11, 2021 2:17 pm The notion that a small value tilt is somehow more complicated than a 3 find portfolio is clearly false. Both are trivial to maintain. There's no value in limiting yourself to 3 funds if you prefer 4. This is false simplicity.
It’s clearly doable, but the benefit is suspect. Going back 20 years, I had sub allocations for

Large Value
Small value
REITS
International small cap
In addition to TSM and Total international

In the end, all the additional “garden tending” made little difference and was probably a disbenefit. And, with a larger portfolio you find yourself running out of tax advantaged space to hold tax inefficient sub classes.

Now that the “secret” of SCV premium is out, I don’t think it exists anymore - if it ever did.
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Re: Simplicity over Small Cap Value

Post by manlymatt83 »

bikechuck wrote: Sun Apr 11, 2021 2:06 pm
Triple digit golfer wrote: Fri Apr 09, 2021 8:12 pm
I could, but I'd be wrong. A total market index fund is neutral. By definition, it holds companies in their market weights.

If it is a preference not to do that, so be it. But a total market index fund does not over or under weight any size, style, or sector.
Thank you for sharing your point of view. The problem lies in the cap weighting as six mega stocks now dominate the S&P 500 and also represent a large percentage of total stock market index funds. This introduces risk, it has not always been that way and there is a sound logical argument for trying to mitigate that risk with adding a small cap fund so these mega corporations are not so over weighted.

I guess it comes down to whether or not you feel the dominant representation of this handful of mega stocks does or does not cause an overweighting of large cap. I think that it does, you think that it does not and there are good arguments on both sides.
In that case, one might hold a US SCV fund only, and not international or emerging markets, and may only hold it for diversification purposes, not for a so called premium.
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Re: Simplicity over Small Cap Value

Post by Outer Marker »

manlymatt83 wrote: Sun Apr 11, 2021 4:10 pm
bikechuck wrote: Sun Apr 11, 2021 2:06 pm
Triple digit golfer wrote: Fri Apr 09, 2021 8:12 pm
I could, but I'd be wrong. A total market index fund is neutral. By definition, it holds companies in their market weights.

If it is a preference not to do that, so be it. But a total market index fund does not over or under weight any size, style, or sector.
Thank you for sharing your point of view. The problem lies in the cap weighting as six mega stocks now dominate the S&P 500 and also represent a large percentage of total stock market index funds. This introduces risk, it has not always been that way and there is a sound logical argument for trying to mitigate that risk with adding a small cap fund so these mega corporations are not so over weighted.

I guess it comes down to whether or not you feel the dominant representation of this handful of mega stocks does or does not cause an overweighting of large cap. I think that it does, you think that it does not and there are good arguments on both sides.
In that case, one might hold a US SCV fund only, and not international or emerging markets, and may only hold it for diversification purposes, not for a so called premium.
Or, you could hold the Vanguard Value Index, which is basically the S&P minus the handful of high flyers. I added a traunch of that just for kicks last year in a relatively small inherited IRA. I’ll have to cash it out in 10 years. Time will tell. I just count it as part of my lumped US equites.
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Re: Simplicity over Small Cap Value

Post by mrpotatoheadsays »

investingforbank wrote: Wed Apr 07, 2021 1:51 pm Hey guys. I recently posted a portfolio that tilts to SCV. I am now rethinking if I am being too complicated and should just stick to total market and total international index funds. I am 18 years old. Should I go with the simplicity or tilt to small cap value? How much extra would I reasonably earn if I did the 25% tilt to SCV? Thanks
From 1970 to 2020, the annualized return of the S&P 500 was 10.7%, while US small-cap value was 13.5%. A 50/50 US/International small-cap value combination was 13.9%.

If you assume every 0.5% over your investing lifetime is worth $1,200,000, the difference here is around $7,200,000.


Reference: https://paulmerriman.com/wp-content/upl ... llions.pdf
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Re: Simplicity over Small Cap Value

Post by Triple digit golfer »

bikechuck wrote: Sun Apr 11, 2021 2:06 pm
Triple digit golfer wrote: Fri Apr 09, 2021 8:12 pm
I could, but I'd be wrong. A total market index fund is neutral. By definition, it holds companies in their market weights.

If it is a preference not to do that, so be it. But a total market index fund does not over or under weight any size, style, or sector.
Thank you for sharing your point of view. The problem lies in the cap weighting as six mega stocks now dominate the S&P 500 and also represent a large percentage of total stock market index funds. This introduces risk, it has not always been that way and there is a sound logical argument for trying to mitigate that risk with adding a small cap fund so these mega corporations are not so over weighted.

I guess it comes down to whether or not you feel the dominant representation of this handful of mega stocks does or does not cause an overweighting of large cap. I think that it does, you think that it does not and there are good arguments on both sides.
I don't think in terms of companies. I think of product lines, diversity, innovation, technology, people, etc. Amazon could easily be about what, 15 companies in one? Starbucks sells coffee. If people decide they don't like coffee or coffee prices skyrocket or coffee causes cancer or whatever, Starbucks can be in trouble. Amazon is so much more diverse in their offerings. They're in grocery, technology, retail, pharmaceutical, cloud computing. Why wouldn't I put more money there?

That's my basic premise for cap weighting.
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Re: Simplicity over Small Cap Value

Post by KyleAAA »

Outer Marker wrote: Sun Apr 11, 2021 2:34 pm
KyleAAA wrote: Sun Apr 11, 2021 2:17 pm The notion that a small value tilt is somehow more complicated than a 3 find portfolio is clearly false. Both are trivial to maintain. There's no value in limiting yourself to 3 funds if you prefer 4. This is false simplicity.
It’s clearly doable, but the benefit is suspect. Going back 20 years, I had sub allocations for

Large Value
Small value
REITS
International small cap
In addition to TSM and Total international

In the end, all the additional “garden tending” made little difference and was probably a disbenefit. And, with a larger portfolio you find yourself running out of tax advantaged space to hold tax inefficient sub classes.

Now that the “secret” of SCV premium is out, I don’t think it exists anymore - if it ever did.
SCV has historically been more tax efficient than total stock market. I have a larger portfolio and I've had no such issues.
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Re: Simplicity over Small Cap Value

Post by Outer Marker »

KyleAAA wrote: Sun Apr 11, 2021 6:47 pm SCV has historically been more tax efficient than total stock market.
That would surprise me. When SCV companies "mature" and graduate from the index, they are sold and generate capital gains in SCV funds, whereas they are held forever in TSM. SCV funds also tend to have a high allocation to REITS, which are were historically very tax inefficient, although became somewhat less so after the Trump tax changes.
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Re: Simplicity over Small Cap Value

Post by investingforbank »

placeholder wrote: Fri Apr 09, 2021 4:41 pm
Taylor Larimore wrote: Fri Apr 09, 2021 12:59 pm
There is no guarantee that you will earn "extra" if you do a 25% "tilt" to Small Cap Value. In my opinion, you are likely to earn less.
Based on what and if it's so likely why don't you recommend tilting AWAY from small value?
I think he means after costs, taxes, and behavioral mistakes
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Re: Simplicity over Small Cap Value

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Outer Marker wrote: Sun Apr 11, 2021 7:44 pm
KyleAAA wrote: Sun Apr 11, 2021 6:47 pm SCV has historically been more tax efficient than total stock market.
That would surprise me. When SCV companies "mature" and graduate from the index, they are sold and generate capital gains in SCV funds, whereas they are held forever in TSM. SCV funds also tend to have a high allocation to REITS, which are were historically very tax inefficient, although became somewhat less so after the Trump tax changes.
Calculate tax efficiency for IJS going back to inception in 2001.
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Re: Simplicity over Small Cap Value

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investingforbank wrote: Wed Apr 07, 2021 1:51 pm Hey guys. I recently posted a portfolio that tilts to SCV. I am now rethinking if I am being too complicated and should just stick to total market and total international index funds. I am 18 years old. Should I go with the simplicity or tilt to small cap value? How much extra would I reasonably earn if I did the 25% tilt to SCV? Thanks
Hmm it's not very complicated just own 50% VT 25% AVUV 25% AVDV. A 25% tilt will not make a huge difference considering SCV funds are long-only funds which load on Beta in addition to Size and Value factors.
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Re: Simplicity over Small Cap Value

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KyleAAA wrote: Mon Apr 12, 2021 10:09 am
Outer Marker wrote: Sun Apr 11, 2021 7:44 pm
KyleAAA wrote: Sun Apr 11, 2021 6:47 pm SCV has historically been more tax efficient than total stock market.
That would surprise me. When SCV companies "mature" and graduate from the index, they are sold and generate capital gains in SCV funds, whereas they are held forever in TSM. SCV funds also tend to have a high allocation to REITS, which are were historically very tax inefficient, although became somewhat less so after the Trump tax changes.
Calculate tax efficiency for IJS going back to inception in 2001.
Being too lazy to look it up, I'd just observe that the performance of one particular SCV fund is not indicative of the performance of all SCV funds. If you're right, our wiki is wrong.

I'm not a SCV hater, and if folks are inclined to do it, that's their choice. But, after decades of doing so myself, I now think the risk of under-performing are greater than over-performing, and that the added complexity and potential tax implications are just added reasons not to do it. Vanguard has access to SCV in their quiver of arrows. They don't include it in a single Target Date or Lifestrategy portfolio. I don't think they are trying to hide the ball from investors.
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"When the facts change."

Post by Taylor Larimore »

Outer Marker wrote: Mon Apr 12, 2021 12:27 pm I'm not a SCV hater, and if folks are inclined to do it, that's their choice. But, after decades of doing so myself, I now think the risk of under-performing are greater than over-performing, and that the added complexity and potential tax implications are just added reasons not to do it. Vanguard has access to SCV in their quiver of arrows. They don't include it in a single Target Date or Lifestrategy portfolio.
Outer Marker:

You remind me of this famous quote from John Maynard Keynes: “When the facts change, I change my mind - what do you do, sir?”

Congratulations and best wishes.
Taylor
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"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Simplicity over Small Cap Value

Post by manlymatt83 »

While I can understand someone not wanting to take the risk adding SCV, it’s hard to argue with someone who wants to slightly tilt to ex-S&P. The difference in valuations between the mega caps and small caps has never been higher, and there’s something to be said for that increased diversification.

I still think VTWAX is safest for simplicity.
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Re: Simplicity over Small Cap Value

Post by placeholder »

investingforbank wrote: Mon Apr 12, 2021 9:23 am
placeholder wrote: Fri Apr 09, 2021 4:41 pm
Taylor Larimore wrote: Fri Apr 09, 2021 12:59 pm
There is no guarantee that you will earn "extra" if you do a 25% "tilt" to Small Cap Value. In my opinion, you are likely to earn less.
Based on what and if it's so likely why don't you recommend tilting AWAY from small value?
I think he means after costs, taxes, and behavioral mistakes
Behavioral mistakes are not something special to small value.
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Re: Simplicity over Small Cap Value

Post by KyleAAA »

Outer Marker wrote: Mon Apr 12, 2021 12:27 pm
KyleAAA wrote: Mon Apr 12, 2021 10:09 am
Outer Marker wrote: Sun Apr 11, 2021 7:44 pm
KyleAAA wrote: Sun Apr 11, 2021 6:47 pm SCV has historically been more tax efficient than total stock market.
That would surprise me. When SCV companies "mature" and graduate from the index, they are sold and generate capital gains in SCV funds, whereas they are held forever in TSM. SCV funds also tend to have a high allocation to REITS, which are were historically very tax inefficient, although became somewhat less so after the Trump tax changes.
Calculate tax efficiency for IJS going back to inception in 2001.
Being too lazy to look it up, I'd just observe that the performance of one particular SCV fund is not indicative of the performance of all SCV funds. If you're right, our wiki is wrong.

I'm not a SCV hater, and if folks are inclined to do it, that's their choice. But, after decades of doing so myself, I now think the risk of under-performing are greater than over-performing, and that the added complexity and potential tax implications are just added reasons not to do it. Vanguard has access to SCV in their quiver of arrows. They don't include it in a single Target Date or Lifestrategy portfolio. I don't think they are trying to hide the ball from investors.
It isn't limited to that fund. Essentially all small-value funds are like this. Even VBR, which is much more of a small/mid fund rather than small, is just about on par with VTI. Yes, the wiki is wrong.
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Re: Simplicity over Small Cap Value

Post by abuss368 »

manlymatt83 wrote: Mon Apr 12, 2021 12:43 pm While I can understand someone not wanting to take the risk adding SCV, it’s hard to argue with someone who wants to slightly tilt to ex-S&P. The difference in valuations between the mega caps and small caps has never been higher, and there’s something to be said for that increased diversification.

I still think VTWAX is safest for simplicity.
It that really “increased diversification” or is it de-worse-ification? The S&P 500 and Total Market holds each company at its market weight. Tilting to small (or any other sector or style) reducing the allocation to the remaining companies. A different perspective may say one is reducing diversification.

There are many Bogleheads who have simply invested in S&P 500 or Total Stock and done very well. Holding one or a few funds may also prevent the urge to tinker with a portfolio and make unfortunate decisions.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity over Small Cap Value

Post by placeholder »

abuss368 wrote: Tue Apr 13, 2021 6:38 pm It that really “increased diversification” or is it de-worse-ification? The S&P 500 and Total Market holds each company at its market weight. Tilting to small (or any other sector or style) reducing the allocation to the remaining companies. A different perspective may say one is reducing diversification.
As very large cap stocks come to dominate the market then small caps held at market weight make no real difference so to get any real diversification (meaning something different from a large cap index) you need to overweight the smalls.
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