Total US+International + 10% small cap?

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passive101
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Total US+International + 10% small cap?

Post by passive101 »

I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.

They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
rossington
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Re: Total US+International + 10% small cap?

Post by rossington »

passive101 wrote: Sat Oct 23, 2021 1:46 am I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.
They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.
This contradicts your initial paragraph...VT is a low cost index fund. What do you mean? 90% VT is not minimal.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
I don't see the 10% small cap moving the needle much either way.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Northern Flicker
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Re: Total US+International + 10% small cap?

Post by Northern Flicker »

If doing this, might as well implement something like as follows for the lower fees:

50% VTI
35% VXUS
10% IJR or VTMSX

instead if VT + small caps. It may not move the needle moving forward, or may detract moving forward, but it was beneficial the last 20+ years:

https://www.portfoliovisualizer.com/bac ... tion4_3=15
Last edited by Northern Flicker on Sat Oct 23, 2021 5:52 pm, edited 2 times in total.
dbr
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Re: Total US+International + 10% small cap?

Post by dbr »

Before you accept a view like that you should study the background for why small cap might be recommended.

It starts here with then Fama-French model: https://en.wikipedia.org/wiki/Fama%E2%8 ... ctor_model

and Larry Swedroe has a book on the topic: https://www.amazon.com/Your-Complete-Gu ... roe+factor

Listening to snippets like that in podcasts mostly just generates garbage even when there is some real background to investigate.

A whole different conversation applies to whether a cap weighted index is a less than optimum investment as a consequence of the fact that such an index by definition heavily weights companies with large market caps:

https://www.bing.com/search?q=cap+weigh ... fde860fefc

https://www.bing.com/search?q=is+the+ca ... F72B688068

Again at the podcast level you are just getting garbage.

A different discussion is whether the more studied conversation is not also garbage. It takes a lot of proving that investing in a simple array of total market funds is not adequate for the reasonable purposes of most personal investors. It does not take a lot of proving to believe that people who write books and present podcasts are left with little to sell if they only advocate simple total market index investing.
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Re: Total US+International + 10% small cap?

Post by angelescrest »

I used to have a 10% small cap ETF in my portfolio when I first started investing. I also had international weighting based on region. This was due to starting out by reading Rick’s book on asset allocation. The rationale was that I could increase gains by several points while reducing risk. Every year I was rebalancing like 10 or so different ETFs, even though my overall portfolio was tiny. Over time I simplified as I began thinking less about my portfolio and squeezing out tiny gains—which I could never prove whether or not any gains came with less risk. The only remnant now is that I have an REIT which I have mixed feelings about. Sometimes I feel the human itch to “do something” more active, but it’s been great for my mind to sit back and think less about it all.
stan1
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Re: Total US+International + 10% small cap?

Post by stan1 »

You can try looking at Portfolio Visualizer

https://www.portfoliovisualizer.com/bac ... tion3_3=10

You can adjust the percentages and see for yourself whether you think it might make a meaningful difference in the future and is worth the effort in your situation.

As @dbr posted this is a very deliberative decision. If you make a change to tilt away from total markets it should be for the rest of your life, otherwise you'll most likely sell low and buy high if you later have doubts about your asset allocation.
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Re: Total US+International + 10% small cap?

Post by MotoTrojan »

passive101 wrote: Sat Oct 23, 2021 1:46 am
90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
I am biased (as my entire portfolio is in value) but small-cap-value is a much better diversifier. I also don't think 10% is enough to move the needle; let's say it outperforms by 1%, that is a 0.1% overall portfolio outperformance, was it worth the complexity and behavioral risk?

Also this last Q is worrying... being 100% US is a big no-no in my view, but this is the Bogleheads forum so there are tons of people that will back you up on that and say it is totally fine. The next 10-20 years will be quite interesting one way or the other in that regard.
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retiredjg
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Re: Total US+International + 10% small cap?

Post by retiredjg »

passive101 wrote: Sat Oct 23, 2021 1:46 am What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.
They probably did not say exactly what you heard. They probably said that holding additional small cap "has resulted in extra gains in the past" or "might give larger gains" or "we think" it will result in larger gains, or something along that line. They can't predict the future any more than anyone else.

A small cap tilt has been good sometimes and not so good sometimes. In the past, many BH have gone this route. Some still do, some have abandoned it.

If you decide to go this route you might have 10 or 20 years of "not so good" before you have a "good" decade. Or it could be the opposite. Or it could end up even. Nobody knows. The important thing is not to flip back and forth. Pick something and stick with it for a very long time.

And have some bonds too. :happy
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Re: Total US+International + 10% small cap?

Post by tibbitts »

It probably doesn't matter much although I tend to overweight both mid and small, which hasn't necessarily worked out so far. However when you added "if you are doing US only funds" that's a much, much bigger issue than 10% overweight in small. I seem to recall that there is some argument that small is more significant with international since smaller companies may be more tied to domestic markets (domestic to whatever country is involved) but I'm not an expert on that, I just somewhat overweight international small as I do domestic mid and small. Partly because I don't have super-easy access to cheap international value, I only do a slight value overweight on the domestic side.
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burritoLover
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Re: Total US+International + 10% small cap?

Post by burritoLover »

I'd do 10% small cap value instead.
Robert20
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Re: Total US+International + 10% small cap?

Post by Robert20 »

VT is not good in regular account as you dont get FTC. Instead VTI + VXUS is just fine
absolute zero
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Re: Total US+International + 10% small cap?

Post by absolute zero »

Holding only 10% in a small cap fund (or in pretty much any fund) seems like a waste of mental energy. I don’t think it’s worth the trouble of deviating from an elegant/simple portfolio (like 100% VT) unless you were willing to go with 20% or more in small caps. But that’s just a personal preference. Perhaps you have a different/lower threshold.
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Beensabu
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Re: Total US+International + 10% small cap?

Post by Beensabu »

At least 20% of portfolio (and no more than 50% of equities) for a tilt to be worth it. That's my opinion.

Don't tilt based on "so and so said". You have to know why. You have to be convinced of the likelihood of it working out better long-term than no tilt.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Total US+International + 10% small cap?

Post by ivgrivchuck »

passive101 wrote: Sat Oct 23, 2021 1:46 am What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.
Not for beginners. Stick with VT (VTI+VXUS in taxable to get the foreign tax credit).

Being a small-value tilter is a life-time commitment. It's also more difficult than it sounds, because finding the "correct" fund is not easy and may change over time.

But if you want to be a small-value tilter, I'd say you should put at least 20% into it to make a meaningful difference. But first study the underlying theory (factors etc.) to make an informed decision.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
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Re: Total US+International + 10% small cap?

Post by UpperNwGuy »

passive101 wrote: Sat Oct 23, 2021 1:46 am What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
I wouldn't do it. I'm not a factor guy. However, if I were a factor guy, I would invest in small cap value, not small cap. And I would go for 20%, not 10%, because 10% of anything simply doesn't make much difference in a portfolio.
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Re: Total US+International + 10% small cap?

Post by Northern Flicker »

stan1 wrote: Sat Oct 23, 2021 9:21 am ... it should be for the rest of your life, otherwise you'll most likely sell low and buy high if you later have doubts about your asset allocation.
So does it or doesn't it move the needle? The imperative to stay the course applies to any allocation decision including the decision to hold the market portfolio. Because a mild size tilt won't move the needle much either way, its presence or absence should not be a big challenge to staying the course. The question would be whether there is a benefit commensurate with the downside of having another fund to manage.

Decisions about international equities are another matter. That's why there are so many long threads on the subject.
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Re: Total US+International + 10% small cap?

Post by zincTwo »

ivgrivchuck wrote: Sat Oct 23, 2021 4:03 pm
passive101 wrote: Sat Oct 23, 2021 1:46 am What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.
But if you want to be a small-value tilter, I'd say you should put at least 20% into it to make a meaningful difference. But first study the underlying theory (factors etc.) to make an informed decision.
I listened to the podcast in the last week, and from what I recall, the speaker said "10% SCV", then both hosts (couldn't tell which) corrected that 20% would be better. The 20% value is in line with the Merriman UBH portfolio added diversification that they discuss ... which has 20% of the equity split between 10% US-SCV, and 10% Intl-SCV.

This also aligns with another book I recently read "2 Funds for Life: A quest for simple & effective investing strategies, by Chris Pedersen (Amazon)...where one of the recommended portfolios was a 80% TDF + 20% SCV, even after retirement. The stated argument for splitting the SCV into 10 in US and 10 intl, was to ensure US didn't get overweighted. After reading the book, I found the included backtested data comparison w/ pure VT/SP500 portfolio to be very compelling.

Disclaimer -- I am a very happy, long-time, Merriman UBH tilter, and since nearing post-retirement will likely move to "TDF+20 SCV" for simplicity.
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passive101
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Re: Total US+International + 10% small cap?

Post by passive101 »

zincTwo wrote: Sat Oct 23, 2021 10:25 pm
ivgrivchuck wrote: Sat Oct 23, 2021 4:03 pm
passive101 wrote: Sat Oct 23, 2021 1:46 am What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.
But if you want to be a small-value tilter, I'd say you should put at least 20% into it to make a meaningful difference. But first study the underlying theory (factors etc.) to make an informed decision.
I listened to the podcast in the last week, and from what I recall, the speaker said "10% SCV", then both hosts (couldn't tell which) corrected that 20% would be better. The 20% value is in line with the Merriman UBH portfolio added diversification that they discuss ... which has 20% of the equity split between 10% US-SCV, and 10% Intl-SCV.

This also aligns with another book I recently read "2 Funds for Life: A quest for simple & effective investing strategies, by Chris Pedersen (Amazon)...where one of the recommended portfolios was a 80% TDF + 20% SCV, even after retirement. The stated argument for splitting the SCV into 10 in US and 10 intl, was to ensure US didn't get overweighted. After reading the book, I found the included backtested data comparison w/ pure VT/SP500 portfolio to be very compelling.

Disclaimer -- I am a very happy, long-time, Merriman UBH tilter, and since nearing post-retirement will likely move to "TDF+20 SCV" for simplicity.

What is the SCV? Is that a single fund?
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zincTwo
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Re: Total US+International + 10% small cap?

Post by zincTwo »

passive101 wrote: Sun Oct 24, 2021 1:20 am What is the SCV? Is that a single fund?
Small-Cap Value can be a single index fund (unless if you want international), typically covering the lower left quadrant of the MorningStar style box. You can learn about some of the reasons for using SCV (as well as tilting to other factors) at paulmerriman.com/all-about-small-cap-value
ETF & MF examples in both US & Intl markets: IJS, ISVL, AVUV, AVDV, VIOV, FISVX, VSIAX, PRSVX,
Outer Marker
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Re: Total US+International + 10% small cap?

Post by Outer Marker »

An overweight bet on small cap (or small cap value) is a bet against all of the strongest and most successful companies in the market. Warren Buffet advocates only the S&P 500 for equity exposure.
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passive101
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Re: Total US+International + 10% small cap?

Post by passive101 »

Outer Marker wrote: Sun Oct 24, 2021 8:38 am An overweight bet on small cap (or small cap value) is a bet against all of the strongest and most successful companies in the market. Warren Buffet advocates only the S&P 500 for equity exposure.
Wouldn't that primarily have missed companies such as Tesla and Amazon when they were lower priced and gaining quickly because of their new ideas?
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Re: Total US+International + 10% small cap?

Post by mrpotatoheadsays »

Outer Marker wrote: Sun Oct 24, 2021 8:38 am An overweight bet on small cap (or small cap value) is a bet against all of the strongest and most successful companies in the market. Warren Buffet advocates only the S&P 500 for equity exposure.
From 1990 to 2019, the compound annual growth rate (CAGR) of:
- S&P 500 was 10.0%
- US Small Cap Value was 12.3%
- Boglehead (US/International)(equity position only) was 8.8%
Reference: https://paulmerriman.com/wp-content/upl ... Charts.pdf

Small companies can be successful too. Investments in small companies are considered more risky than investments in large companies. More risk can result in more reward. By limiting yourself to the US Large Cap Blend (S&P 500 or Total Market) you avoid (or highly diminish) the benefit of small caps. Over a lifetime, that benefit can be huge.... possibly millions of dollars.
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mrpotatoheadsays
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Re: Total US+International + 10% small cap?

Post by mrpotatoheadsays »

passive101 wrote: Sat Oct 23, 2021 1:46 am What do you guys think of having the total market funds along with having an extra 10% in the small cap?
Tom and Don are speaking of Small Cap Value, not Small Cap {Blend}.

They follow the teachings and research of Paul Merriman. I recommend you read his book We’re Talking Millions (free download) which covers the "two funds for life" approach. You surely could replace the target date fund with the total markets. The approach uses a formula to determine how much small cap value you should hold during your lifetime. The 10% mentioned is the most simplistic approach. Historically, it has paid to have a larger small cap value allocation earlier in life.

It is a good approach, but I chose to have far more diversified portfolio that resembles Merriman's Ultimate Buy and Hold.

Reference: https://paulmerriman.com/2-funds-for-life-book/
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Re: Total US+International + 10% small cap?

Post by Outer Marker »

passive101 wrote: Sun Oct 24, 2021 8:40 am
Outer Marker wrote: Sun Oct 24, 2021 8:38 am An overweight bet on small cap (or small cap value) is a bet against all of the strongest and most successful companies in the market. Warren Buffet advocates only the S&P 500 for equity exposure.
Wouldn't that primarily have missed companies such as Tesla and Amazon when they were lower priced and gaining quickly because of their new ideas?
I use Total Stock Market vs. the S&P 500 - so I captured Tesla and Amazon. But, if you look at the long term performance charts the results between those indexes are indistinguishable. For every Tesla or Amazon, there are many, many more small cap companies that fail. At the end of the day, I don't think the risk/reward trade off is worth it. I say this as a reformed former slicer-and-dicer with a complicated portfolio and significant small value tilt. I stuck with it for two decades. It wasn't worth the effort, and frankly would have done slightly better with a total market approach.
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Re: Total US+International + 10% small cap?

Post by Activesloth »

So-called financial experts have been predicting that international stocks will outpace US stocks. It hasn’t happened so far in the past decade. VOO has returned 16% annually for 10 years while VGK Europe has averaged 8%. The difference is huge, so I’m staying 100% domestic. If one day international stocks finally overtake US stocks, it only takes 5 minutes on my iPad to go from 100% US to 100% international if necessary. These shifts in performance happen over years, even decades. What could you possibly miss in 5 minutes?
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Re: Total US+International + 10% small cap?

Post by steve r »

mrpotatoheadsays wrote: Sun Oct 24, 2021 9:23 am
Outer Marker wrote: Sun Oct 24, 2021 8:38 am An overweight bet on small cap (or small cap value) is a bet against all of the strongest and most successful companies in the market. Warren Buffet advocates only the S&P 500 for equity exposure.
From 1990 to 2019, the compound annual growth rate (CAGR) of:
- S&P 500 was 10.0%
- US Small Cap Value was 12.3%
- Boglehead (US/International)(equity position only) was 8.8%
Reference: https://paulmerriman.com/wp-content/upl ... Charts.pdf

Small companies can be successful too. Investments in small companies are considered more risky than investments in large companies. More risk can result in more reward. By limiting yourself to the US Large Cap Blend (S&P 500 or Total Market) you avoid (or highly diminish) the benefit of small caps. Over a lifetime, that benefit can be huge.... possibly millions of dollars.
Back testing data is strong, no question about it. More impressive still is using Simba data from 1970 to 2020. You pick up about 25 basis points with the SCV or SC 10 percent tilt.

That said, I avoid such strategies because behavioral issues. Questions come up like: Why only 10%? SC hit the cover off the ball during those 50 years relative to total world markets (11.3% versus 9.7 for VT). SCV did even better (12.5%). Then, you have a stretch where you are constantly rebalancing into an asset class that is underperforming. After a couple of years of that, staying the course becomes problematic for me.

As I age and live through such rebalancing issues I have become a bigger fan of Target Date Funds or Life Cycle Funds because staying the course is much easier. I use Schwab with no international bonds, 35 percent of equities in international, expense ratio of 0.08.

Vanguard is lowering its TRF expenses to 0.08 as well. https://pressroom.vanguard.com/news/Pre ... 92821.html
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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Re: Total US+International + 10% small cap?

Post by Northern Flicker »

mrpotatoheadsays wrote: Sun Oct 24, 2021 9:23 am
Outer Marker wrote: Sun Oct 24, 2021 8:38 am An overweight bet on small cap (or small cap value) is a bet against all of the strongest and most successful companies in the market. Warren Buffet advocates only the S&P 500 for equity exposure.
From 1990 to 2019, the compound annual growth rate (CAGR) of:
- S&P 500 was 10.0%
- US Small Cap Value was 12.3%
- Boglehead (US/International)(equity position only) was 8.8%
Which Boglehead?
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passive101
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Re: Total US+International + 10% small cap?

Post by passive101 »

I decided to switch my portfolio to 90% VTWAX and 10% VSIAX.

I'm 41 and have almost 20 years left before I can take out of this IRA. If I want it slightly less aggressive I can just axe the 10% small cap and switch back to 100% VTWAX.

From what I'm reading it looks like more often then not the smaller businesses do pretty well and better then average with ingenuity and new ideas.
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mrpotatoheadsays
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Re: Total US+International + 10% small cap?

Post by mrpotatoheadsays »

passive101 wrote: Tue Oct 26, 2021 3:33 am I decided to switch my portfolio to 90% VTWAX and 10% VSIAX.
You, and everyone else who is following, should understand that the historical metrics on small cap value are on:
- small: smallest of small
- value: deep value

VSIAX is not smallest of small; in fact its practically mid-cap. VSIAX is also not deep value. Therefore, you should not expect the best, long-term small cap value returns. You are going with a much more conservative small/mid cap value fund - less risk, less reward.

Go to Morningstar and compare VSIAX's portfolio to AVUV's.
- VSIAX is 42% mid-cap or larger.
- AVUV is 8% mid-cap or larger.
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Re: Total US+International + 10% small cap?

Post by dbr »

mrpotatoheadsays wrote: Tue Oct 26, 2021 2:13 pm
passive101 wrote: Tue Oct 26, 2021 3:33 am I decided to switch my portfolio to 90% VTWAX and 10% VSIAX.
You, and everyone else who is following, should understand that the historical metrics on small cap value are on:
- small: smallest of small
- value: deep value

VSIAX is not smallest of small; in fact its practically mid-cap. VSIAX is also not deep value. Therefore, you should not expect the best, long-term small cap value returns. You are going with a much more conservative small/mid cap value fund - less risk, less reward.

Go to Morningstar and compare VSIAX's portfolio to AVUV's.
- VSIAX is 42% mid-cap or larger.
- AVUV is 8% mid-cap or larger.
The factor loadings can be found using Portfolio Visualizer factor regression. This confirms the above point.
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Re: Total US+International + 10% small cap?

Post by Northern Flicker »

mrpotatoheadsays wrote: Tue Oct 26, 2021 2:13 pm
passive101 wrote: Tue Oct 26, 2021 3:33 am I decided to switch my portfolio to 90% VTWAX and 10% VSIAX.
You, and everyone else who is following, should understand that the historical metrics on small cap value are on:
- small: smallest of small
- value: deep value

VSIAX is not smallest of small; in fact its practically mid-cap. VSIAX is also not deep value. Therefore, you should not expect the best, long-term small cap value returns. You are going with a much more conservative small/mid cap value fund - less risk, less reward.

Go to Morningstar and compare VSIAX's portfolio to AVUV's.
- VSIAX is 42% mid-cap or larger.
- AVUV is 8% mid-cap or larger.
If you combine VSIAX/VBR or AVUV with a market cap portfolio to implement a tilt, the difference is that if you use VBR, you will need more of it to accomplish a given factor loading relative to how much AVUV you need to accomplish the same loading.

https://www.portfoliovisualizer.com/fac ... tion2_1=40

https://www.portfoliovisualizer.com/fac ... tion2_1=25

The implementation with VBR has an aggregate ER of 4.6 bp/yr at present, vs. 8.5 bp/yr for AVUV with roughly the same loadings on size and value implemented in each case. I used the same time period for both regressions. A caveat is that it is not a very long period for the regression because AVUV is a newer product.
Last edited by Northern Flicker on Tue Oct 26, 2021 3:11 pm, edited 6 times in total.
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Re: Total US+International + 10% small cap?

Post by invest2bfree »

passive101 wrote: Sat Oct 23, 2021 1:46 am I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.

They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
Look at my signature, I do exactly that but not at the same magnitude.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
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Re: Total US+International + 10% small cap?

Post by Northern Flicker »

Relevant though is the lack of loading on quality for VBR:

https://www.portfoliovisualizer.com/fac ... sion=false
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Re: Total US+International + 10% small cap?

Post by Taylor Larimore »

passive101 wrote: Sat Oct 23, 2021 1:46 am I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.

They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
passive101:

The investment industry spends millions of dollars each year urging us to "do something." It is how they make their money. The Boglehead Philosophy is to "stay the course" (assuming it is the right course).

Ten years ago small-cap-value stocks were promoted by the industry based on past performance (which the government requires funds to warn us against). Here's what happened to $10,000 invested in Vanguard small-cap value stocks during the next ten years:

Vanguard Total Stock Market (VTSAX) returned $45,402
Vanguard Small Cape Value (VSIAX) returned $33,408

My advice is to listen to experts and keep investing simple using only total market index funds:

viewtopic.php?f=10&t=156579

Please read my "Simplicity" link below.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "One of the seemingly indestructible myths of investing is that stocks with small market capitalizations outpace stocks with large market capitalizations over time."
"Simplicity is the master key to financial success." -- Jack Bogle
rosalee
Posts: 130
Joined: Sat Oct 17, 2020 7:17 pm

Re: Total US+International + 10% small cap?

Post by rosalee »

I checked the funds mentioned by Taylor L over the last 10 years. Nearly all of the difference between the two funds happened during last 2 years. Prior to 2019, i found very little difference between VTIAX and VTSAX.

And comparing small value ETFs over the last 10 years, VBK (growth) v VBR (value), we find that the largest difference happened over the last year only.

So, IMO, whether small or large, growth stocks have outperformed value since 2019, and especially since COVID raised its head. Why or what to do now, i have no knowledge nor opinion.
Northern Flicker
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Re: Total US+International + 10% small cap?

Post by Northern Flicker »

Taylor Larimore wrote: Ten years ago small-cap-value stocks were promoted by the industry based on past performance (which the government requires funds to warn us against). Here's what happened to $10,000 invested in Vanguard small-cap value stocks during the next ten years:

Vanguard Total Stock Market (VTSAX) returned $45,402
Vanguard Small Cap Value (VSIAX) returned $33,408
I assume these 10 year returns are correct, but I believe that it is incorrect to imply that investing in small value was a marketing initiative of the fund industry specific to the time period 10 years ago. The seminal Fama & French paper on the subject was published in 1992.

I agree with Gene Fama when he said that many individual investors are better off with a total market index fund, and that an untilted portfolio is a fine choice for any individual investor (I hope that I paraphrased him correctly). But for those who understand the risks and the need for staying the course with factor investing, it is a legitimate, systematic way to take more risk to try to beat the market.

Holding just the S&P 500 is also a factor tilt by the way. It has a mild positive tilt on the quality factor, and a negative tilt on the size factor. Thus, if you only hold the S&P500, you have a factor-tilted portfolio, and are making a bet on the quality factor, and a bet against the size factor.
Life Is Good
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Location: Wisconsin

Re: Total US+International + 10% small cap?

Post by Life Is Good »

Our $2M+ portfolio tilts small caps by 10%-15% as you mention. In only one account... my wife's Roth IRA holds 100% VSMAX and always has. We've done so from the very beginning. The main reason is that if we invest in TSM in all our accounts, that is a large amount of money going to the top 10 companies in the US every payday to my 401k and HSA, and bimonthly into our respective Roth IRAs. We wanted to put some money toward the smaller companies as well. In the last 20 years, it has boosted our returns by just a bit, but that wasn't why we did it.

We will continue with this strategy. It may or may not move the needle much. It's more of an effort to divert just a little money from the same big companies over and over.

Since Nov 2, 2001 (~20 years we've invested this way):
VTSAX +372.18%
VSMAX +509.57%
Trader Joe
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Re: Total US+International + 10% small cap?

Post by Trader Joe »

passive101 wrote: Sat Oct 23, 2021 1:46 am I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.

They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
I think this is a recipe for a 10% disaster. Avoid this advice.

I am 100% VTSAX/VFIAX and I am very happy.
Grt2bOutdoors
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Location: New York

Re: Total US+International + 10% small cap?

Post by Grt2bOutdoors »

passive101 wrote: Sat Oct 23, 2021 1:46 am I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.

They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
They recommend VT + 10% small cap value. For small value they recommend AVUV, if not available they recommend VBR.
From January 2009 to September 2021, a 90/10 split between VT and VBR on a $10,000 investment with dividends reinvested returned $41,876 (CAGR was 11.89%) where as a 100% allocation to VT (CAGR of 11.65%) returned $40,770. Some say the difference is a rounding error, but it might be worthwhile for others.

If you held an 80/20 split, the same $10,000 with dividends reinvested had an ending value of $42,977 with a compound annual rate of return of 12.12% vs. 11.65% for VT.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
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Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Total US+International + 10% small cap?

Post by Grt2bOutdoors »

Trader Joe wrote: Thu Oct 28, 2021 8:49 pm
passive101 wrote: Sat Oct 23, 2021 1:46 am I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.

They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
I think this is a recipe for a 10% disaster. Avoid this advice.

I am 100% VTSAX/VFIAX and I am very happy.
You hold two overlapping funds that are growth tilted, of course you'd be happy as growth has outperformed value.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
averagedude
Posts: 1772
Joined: Sun May 13, 2018 3:41 pm

Re: Total US+International + 10% small cap?

Post by averagedude »

I am all for a tilt to small cap, but I have the opinion that your long term investment returns will have more to do with your allocation of stocks and bonds than your allocation of large caps and small caps. The most important thing when it comes to investing is getting the right asset allocation.
Northern Flicker
Posts: 15288
Joined: Fri Apr 10, 2015 12:29 am

Re: Total US+International + 10% small cap?

Post by Northern Flicker »

Grt2bOutdoors wrote: Thu Oct 28, 2021 8:59 pm
Trader Joe wrote: Thu Oct 28, 2021 8:49 pm
passive101 wrote: Sat Oct 23, 2021 1:46 am I was listening to the Talking Real Money podcast and they were talking about what they recommend. They really like some of the total market funds such as VT from vanguard but they say you should have VT plus an additional 10% in the small cap because the s&p 500 and VT are more heavily weighed on established larger US companies. Over time having additional small cap can be more beneficial in the portfolio and will give larger gains.

They are a 100% fee only fiduciary and believe in using minimal amounts of low cost index funds to achieve investment goals.

What do you guys think of having the total market funds along with having an extra 10% in the small cap?

90% VT
10% small cap.

If you are doing US only funds
90% total US market
10% small cap
I think this is a recipe for a 10% disaster. Avoid this advice.

I am 100% VTSAX/VFIAX and I am very happy.
You hold two overlapping funds that are growth tilted, of course you'd be happy as growth has outperformed value.
VTSAX is untilted. The market portfolio diversifies away all factor exposures except the market factor by definition of factors. The S&P500 has actually had a slight value tilt using Fana-French factors regressed since 1/1/2020.

https://www.portfoliovisualizer.com/fac ... sion=false

and neutral with respect to value and growth using AQR factors:

https://www.portfoliovisualizer.com/fac ... sion=false

Some advisors and writers erroneously call the total market and S&P500 indices growth portfolios because the largest stocks in them often are growth stocks, but the majority of either fund is other stocks.
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