It's somewhat tempting instead of VT+AVUV, AVDV, AVES. I've also had crazy thoughts of my roth being equal weights AVUV, AVDV, AVESMotoTrojan wrote: ↑Thu Sep 23, 2021 9:22 amI am at 60% now (well, once I swap FNDE for AVES). Equal-weighting between those 3 and QVAL/IVAL.Massdriver wrote: ↑Thu Sep 23, 2021 9:00 am
I've been increasing my tilt the last 18 months towards SCV/factors in accordance with my plan. I wouldn't have a problem sleeping with a 50% allocation to Avantis funds (AVUV, AVDV, AVES).
If I weren't in love with Alpha Architect, I think the dream portoflio would be a 5-fund equal-weight of AVUV/AVLV/AVDV/AVIV/AVES. Strong tilt across cap-sizes, low-cost/turnover, profit.
Small Cap Value heads Rejoice !!!
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Re: Small Cap Value heads Rejoice !!!
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Re: Small Cap Value heads Rejoice !!!
Why wait.Massdriver wrote: ↑Thu Sep 23, 2021 12:31 pmIt's somewhat tempting instead of VT+AVUV, AVDV, AVES. I've also had crazy thoughts of my roth being equal weights AVUV, AVDV, AVESMotoTrojan wrote: ↑Thu Sep 23, 2021 9:22 amI am at 60% now (well, once I swap FNDE for AVES). Equal-weighting between those 3 and QVAL/IVAL.Massdriver wrote: ↑Thu Sep 23, 2021 9:00 am
I've been increasing my tilt the last 18 months towards SCV/factors in accordance with my plan. I wouldn't have a problem sleeping with a 50% allocation to Avantis funds (AVUV, AVDV, AVES).
If I weren't in love with Alpha Architect, I think the dream portoflio would be a 5-fund equal-weight of AVUV/AVLV/AVDV/AVIV/AVES. Strong tilt across cap-sizes, low-cost/turnover, profit.
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
Momentum: |
5% QMOM |
5% IMOM |
Volatility: |
0.1% PUTW |
Term: |
0.1% BND
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Re: Small Cap Value heads Rejoice !!!
EM doesn’t have to be better, or even as good, so long as it’s not perfectly correlated. Portfolio composition is everythingOne More Thing wrote: ↑Thu Sep 23, 2021 3:54 pmWhat is the case for taking on the risk of EMs? I know that they had a recent tear but is it persistent? Can it be a lifelong risk worth taking?
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
Momentum: |
5% QMOM |
5% IMOM |
Volatility: |
0.1% PUTW |
Term: |
0.1% BND
Re: Small Cap Value heads Rejoice !!!
Have you guys seen vineviz's Five Fund Portfolio? With the advent of Avantis funds, I imagine a more modern take on it could look something like this:One More Thing wrote: ↑Thu Sep 23, 2021 8:29 amI now have this image of a new Three Fund Portfolio being VTI, AVDV, and BND/W.MotoTrojan wrote: ↑Thu Sep 23, 2021 8:11 amFor those that are uncomfortable going market-weight to international (or even overweighting) I think a strong/valid strategy is to overweight their value tilt abroad to get more effective exposure to those market's risk-premiums. You could even go all SCV for your foreign stocks.
For example if someone were only comfortable with 25% abroad I think this would be a fantastic portfolio:
50% VTI
25% AVUV
15% AVDV
10% AVES
32% VTI
16% AVUV
16% AVDV
16% AVES
20% EDV
See: viewtopic.php?t=286862
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Re: Small Cap Value heads Rejoice !!!
Can you recommend any sources about the benefits of emerging markets investing? I take it that they do not correlate with US or international stocks. If so, color me intrigued at least.FiveFactor wrote: ↑Thu Sep 23, 2021 4:01 pmEM doesn’t have to be better, or even as good, so long as it’s not perfectly correlated. Portfolio composition is everythingOne More Thing wrote: ↑Thu Sep 23, 2021 3:54 pmWhat is the case for taking on the risk of EMs? I know that they had a recent tear but is it persistent? Can it be a lifelong risk worth taking?
Re: Small Cap Value heads Rejoice !!!
It’s just a different set of markets. Like investing in US but also Japan. So why not also Brazil, Russia, China, India, Mexico, South Africa etc
Crom laughs at your Four Winds
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Re: Small Cap Value heads Rejoice !!!
Would they not be riskier than developed markets though? If they are riskier does it have a persistent payoff of some kind? Or are EMs like the regional equivalent to small caps?
Re: Small Cap Value heads Rejoice !!!
Who knows. they are different risks. Probably priced correctly.
Crom laughs at your Four Winds
Re: Small Cap Value heads Rejoice !!!
What’s the general Boglehead consensus around VSMAX? If I’m unsure about the Avantis track record, since it’s so new, but I still want to believe I should overweight small caps? Is there a better option? I’m just skeptical of anyone, individual or company, to ultimately pick winners or losers.
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Re: Small Cap Value heads Rejoice !!!
One way of answering that question is that if you assume there is an expected return premium associated with those risks, and it is not perfectly correlated with developed market risks and their associated premiums, then in theory it could be a useful portfolio diversifier.One More Thing wrote: ↑Thu Sep 23, 2021 3:54 pmWhat is the case for taking on the risk of EMs? I know that they had a recent tear but is it persistent? Can it be a lifelong risk worth taking?
I note that I am personally skeptical of trying to "backtest" such a hypothesis. It might be psychologically comforting if someone can show you how some portfolio was improved by including EM over some recent prior period. But really if you are doing this in a forward-looking way, as applied to something as complicated and ever-changing as "emerging markets," I just don't think such backtesting is even prima facie meaningful.
Taking a step back, my general philosophy is that in the future, I want to own a personally significant share of global economic production such that the income from that production can meet my spending needs. I am reluctant to leave out EM because it certainly seems possible a lot of future economic production will be associated with at least a lot of those countries.
Indeed, I believe depending on your definitions, something like 40% of global GDP is now in EM countries, but only around 25% of marketed securities by cap weight, and even less if you apply various common liquidity and other such screens to determine the reasonably-investable securities for global investors (I think that gets you down to around 12.5%, give or take). However, all of those numbers have been rising (at least over longer terms).
And in fact it seems like a reasonable bet that at least in many of these countries, not least as their own investor pools increase with economic development, but also as various reform efforts continue, and so on, that the cap-weighted percentage of investable EM (or former EM?) securities will converge at least somewhat toward the (rising) marketed-security and GDP shares of these countries, including just because of converging valuations.
So personally, if your ultimate goal is to have anything close to a proportionate investment in these countries in such a future, I at least suspect it is a better idea to start buying now as opposed to waiting until that future has already arrived.
Which, if you like, you can call a value strategy, a buy low strategy, a diversified risk premium strategy, or so on.
Finally, I note with a 40% allocation to ex-U.S. and 20% minimum target for EM, by my own terms I am already underweight in EM! Of course it was a more reasonable target back when I adopted it, and at the moment I don't think 8% or 12.5% really makes a difference. I might also have some EM in other funds, plus there is an argument you get at least some EM exposure through other stocks, so I don't see it as a big deal. But in theory I really should have been letting this target float up over time too.
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Re: Small Cap Value heads Rejoice !!!
VSMAX appears to be just a small cap fund which means it probably doesn't load much if any on other factors aside from size. There are Vanguard Small Cap Value ETFs that you could look at purchasing if you are uncomfortable with Avantis such as VIOV and VBR. The idea here is to capture more than one factor in a single fund. As a quick visualizer, ETF.com will give you factor tilts within funds. Scroll down and you can find the factor loadings of VIOV: https://www.etf.com/VIOV#overviewbluerafters wrote: ↑Fri Sep 24, 2021 2:12 am What’s the general Boglehead consensus around VSMAX? If I’m unsure about the Avantis track record, since it’s so new, but I still want to believe I should overweight small caps? Is there a better option? I’m just skeptical of anyone, individual or company, to ultimately pick winners or losers.
There is tons of information about factor investing in this thread and spread throughout the BH forums. I'm just going to post this to give you an idea of what many of us are doing with our portfolios by tilting.
Read the rest here: https://www.optimizedportfolio.com/factor-investing/Factor investing refers to specifically targeting independent risk factors in securities markets that explain the differences in returns between diversified portfolios. Here we’ll look at what factor investing is, various factor models from the research, and how to do it using factor ETFs.
What Is Factor Investing?
Factor investing simply refers to consciously overweighting, or tilting, specific assets above their market weight to attempt to capture a premium (excess return) from an independent source of risk, known as a risk factor. These risk factors explain the differences in returns between diversified portfolios previously attributed to “skill.” The handful of widely accepted factors includes Beta, Size, Value, Momentum, Profitability, and Investment. We’ll explore these more later.
Factor investing involves identifying stocks and/or funds with excess exposure to these factors that can be bought wherein associated fees and transaction costs do not outweigh the expected factor premium. As we’ll discuss below, benefits from factor investing include the obvious greater expected returns but also, conveniently and perhaps counterintuitively, lower portfolio risk by diversifying the specific sources of that risk.
There currently exist several proposed factor models, as well as criteria for including any given factor in those models.
From the Rational Reminder Forums:
Full post here: https://community.rationalreminder.ca/t ... ere/5717/22. What is Factor Investing?
Factor investing sounds like a new concept, but it is actually very old. It dates from the time of Benjamin Graham and his books The Intelligent Investor and Security Analysis, which go as far as 1934. The main idea in those books was that stocks with certain characteristics have a better chance of increasing your wealth. These characteristics were mainly related to the idea of value+quality investing - Buy high-quality companies, but don’t pay too much for them.
Many decades later, researchers have caught up to Graham’s idea and found several distinctive predictors of stock returns. They called them factors, which are actually not much different than what Graham was talking about. They are simply a diversified way of applying what Graham has intuitively discovered a century ago.
Fast forward to 2014, and the five-factor model was born, developed by Eugene Fama and Ken French, probably two of the most influential economists of our age. The five-factor model explains about 95% of diversified portfolio returns, unlike its predecessor CAPM, which was able to explain (only) 65%. The five-factor model contains the following factors:
Market factor (β) - Stocks have higher returns than risk-free assets (market beta, also known as RmF - Risk minus Free)
Value factor (HmL) - Value stocks (high book-to-market) beat growth stocks (low book-to-market) (High minus Low)
Size factor (SmB) - Small stocks beat large stocks (Small minus Big)
Profitability factor (RmW) - Companies with robust profitability beat the companies with weak profitability (Robust minus Weak)
Investment factor (CmA) - Companies that invest conservatively beat companies that invest aggressively (Conservative minus Aggressive)
The common theoretical explanation behind these factors is that they are a reward for taking more risk. For instance, lower-priced (value) stocks are being priced by the market as riskier to hold than higher-priced (growth) stocks. However, there is another side of this discussion - the behavioral one, which could also explain the factors. For instance, investors might be consistently overpaying for expected growth, irrationally bidding up growth stocks over value stocks, making growth stocks more expensive than their ''fundamental" value. The discussion goes back to whether markets are fully efficient or not - something on which even two Nobel laureates couldn’t agree on 6.
Whatever the reason is (it’s probably both) - factors have been persistently robust in delivering return premiums, and investor benefits twofold from investing in factors in comparison to a simple market-cap ETF:
Potentially higher returns due to the exposure to factors
Diversification benefits due to the exposure to various factors with low correlation (basically, not putting all your eggs in the market beta basket)
Hopefully, this community presents you with enough convincing evidence to consider pursuing multiple factor premiums as well! But don’t take our word for it - read the discussions, papers, books - listen to the podcasts - watch videos. Make up your own mind as many of us have. Question things. Follow the evidence.
Even when fully grasping the information, many investors will choose the path of simplicity, and there is nothing wrong with that. We had a colorful discussion on the pros and cons of more complicated portfolios for the sake of higher expected returns here 20.
Re: Small Cap Value heads Rejoice !!!
SCV a ray of sunshine on a cloudy day
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Re: Small Cap Value heads Rejoice !!!
Those funds should perform differently from time to time:
https://www.portfoliovisualizer.com/fac ... sion=false
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
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5% QMOM |
5% IMOM |
Volatility: |
0.1% PUTW |
Term: |
0.1% BND
Re: Small Cap Value heads Rejoice !!!
Others covered VSMAX pretty well, and had their quoted definitions on Five Factor Investing, just for fun, this is how I explain five factor investing:bluerafters wrote: ↑Fri Sep 24, 2021 2:12 am What’s the general Boglehead consensus around VSMAX? If I’m unsure about the Avantis track record, since it’s so new, but I still want to believe I should overweight small caps? Is there a better option? I’m just skeptical of anyone, individual or company, to ultimately pick winners or losers.
Academics have been trying to explain how the public stock markets work. Their goal is to explain 100% of the public stock markets. In the 1970's academic literature was able to account for roughly 2/3rds of public market returns. In the 1990's 2 guys(Fama and French, Nobel prize winners) figured out a 3 factor model in 1992 that theoretically explains almost 90% of the market.
Today, in the 5 factor model papers, they are able to explain 95% of the public market's returns. This sounds AMAZING. If we KNOW empirically that we can reliably make 95% of the market with effectively no work and no extra risk, who wouldn't take the deal?
Since the 5 factor model, academics have gone crazy for factors and are publishing new factors every other day trying to finish it off and explain the remaining 5%. So far none of these other "factors" have been even remotely provable. The 5 factor model so far has held up to scrutiny and it's likely mostly true, but so far WHY it's true is still up in the air, this paper says:
So it doesn't seem to be rational risks, so perhaps it's behavioural? i.e. Momentum comes from Greed and the other factors come from Fear. It's a theory. So far unproven.Across several tests we find no supporting evidence for these explanations, with global return factors bearing basically no relationship to market, downside or macroeconomic risks.
Unfortunately reality makes this not the utopia of investing we might think it is, this method of investing is guaranteed to be a very bumpy, emotional ride, you absolutely must prepare to lose to the market for many decades. The academic theory is you will eventually be rewarded. Also, there has yet been no good consensus on how to implement the 5 factors well that are easily investable. This part is changing, but it's still very much an ongoing debate.
So I believe the 5 factor model is mostly true. I also believe that for most investors it's probably a questionable way to invest, but I support it, if you think you have the ability to invest in it for the rest of your life.
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
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Re: Small Cap Value heads Rejoice !!!
1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
Momentum: |
5% QMOM |
5% IMOM |
Volatility: |
0.1% PUTW |
Term: |
0.1% BND
- willthrill81
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Re: Small Cap Value heads Rejoice !!!
Correct on both counts.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
I personally don't see where 'heartache and emotional pain' fit into the picture. BHs should be long-term investors who aren't phased by having a portfolio that performs differently than the S&P 500. Heck, if someone is worried about 'underperforming the market', they should be far more concerned about their fixed-income holdings than something like SCV.
The Sensible Steward
Re: Small Cap Value heads Rejoice !!!
1: Only in terms of absolute returns without considering risk. Factor approach probably only makes sense if trying to achieve a >100% effective stock portfolio without leverage.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
2: Seems unlikely excessive premia can survive the availability of factor ETFs for long.
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Re: Small Cap Value heads Rejoice !!!
Based on what allocation though?FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
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Re: Small Cap Value heads Rejoice !!!
000 wrote: ↑Fri Sep 24, 2021 8:39 pm1: Only in terms of absolute returns without considering risk. Factor approach probably only makes sense if trying to achieve a >100% effective stock portfolio without leverage.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
2: Seems unlikely excessive premia can survive the availability of factor ETFs for long.
1. Factors allow you to diversify your sources of risk premiums and actually increase your bond allocation, overall leading to similar and more consistent returns with less risk if you desire.
2. You are assuming that the introduction of factor based ETFs will lead to more inflows, increase the valuations, and lessen the risk premia. Let's do a thought experiment: Go to YouTube and search for "S&P 500" or "Ark Invest" and compare that to "Avantis Small Cap Value". Please tell me which gives you greater results/views. Hint: it's not Small Cap Value ETFs.
If what you are arguing is true, then the spreads should not have widened to some of the greatest levels in history at the current moment. That means more money is rushing into index funds and large cap growth stocks than Small Cap Value. And there's an argument to be made that the SCV premium isn't entirely risk based, but behaviorally based. With the advent of social media, it looks like the behavioral issues have actually increased. People know and invest in popular names that have grown tremendously the past decade. They don't know and invest in smaller companies that many haven't even heard of. They're not nearly as exciting at face value.
If anything, the opportunity to capture the risk premiums has never been greater than it is now. And of course, if you backtest from 1993 to 2011, the SCV premium was 3%. So the question is whether mean reversion will occur and SCV will outperform, or is the 1% some true long-term norm? It would be better to backtest in a scenario where starting and ending spreads were at historically normal levels rather than picking dates that may be more advantageous due to outperformance based upon abnormally high or low spreads.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: Small Cap Value heads Rejoice !!!
Yes. Hence my question on just holding a general small cap fund.000 wrote: ↑Fri Sep 24, 2021 8:39 pm1: Only in terms of absolute returns without considering risk. Factor approach probably only makes sense if trying to achieve a >100% effective stock portfolio without leverage.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
2: Seems unlikely excessive premia can survive the availability of factor ETFs for long.
Re: Small Cap Value heads Rejoice !!!
1) I totally agree, 1% premium over 30 years is great. I never said otherwise. The investing world is still trying to get people out from under Edward Jones and the like where the take well over 1% in fees(I think they are around 1.7% all in these days). Investing is still a very black art to many. There are whole threads here about SCV being hard to swallow, which was my point.willthrill81 wrote: ↑Fri Sep 24, 2021 6:35 pmCorrect on both counts.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
I personally don't see where 'heartache and emotional pain' fit into the picture. BHs should be long-term investors who aren't phased by having a portfolio that performs differently than the S&P 500. Heck, if someone is worried about 'underperforming the market', they should be far more concerned about their fixed-income holdings than something like SCV.
Around #2 though, the DFA funds which are the longest lived real-world 5 factor funds, if you tilted 100% to SCV, you can eek out a 1.3% premium but I've never seen anyone recommend 100% SCV to anyone. Fama & French used a 50% SCV tilt(If I remember right), Ben Felix, Paul Merriman and the other large 5 factor people never recommend a tilt even approaching 50%, let alone 100% tilt. I know some people claim to be 100% SCV tilt, and maybe a few exist, but I would be very surprised if a financial advisor ever recommended such a thing(I've certainly never seen any publicly recommend anything resembling even a 50% tilt).
I remember one of the big academic 5 factor people did study recently about if SCV premium was dead or not and they concluded not quite dead but 1% seems like high assumptions anymore. I can't remember where to find that study at the moment. Hopefully someone smarter than me has it handy.
So far the 1% excess return is nowhere near what we have in the real world, with real world portfolios people publicly recommend. So while > 1% might be theoretically possible across one's investing lifetime, it's not currently found in peoples portfolios, and even the academics don't seem to suggest more than a 1% premium at best(I could be wrong, but I've never seen a paper expecting anything > 1%).
If everyone is so convinced > 1% return is possible, why are target date retirement funds not using them? None of the LifeStrategy funds(or similar) uses them. Why doesn't Vanguard or other brokerage recommend five factor investing(I've certainly never seen any brokerage recommend anything resembling a five factor portfolio)?
As for heartache and emotional pain, it's obvious that SCV will underperform something like VTI for very long periods of time, there are entire threads on this forum about it. So we have loads of proof that many many people can't stomach a small tilted five factor portfolio, those threads are proof. Of course the same could be said for investors holding VTI and bailing when the going gets rough. It's not a problem unique to the five factor crowd by any means. But to assume it doesn't exist, when there are huge threads all about it, seems disengenious.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
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Re: Small Cap Value heads Rejoice !!!
There are reasons to own SCV other than more performance - diversification. 2000-2009 was great for SCV, bad for US TSMzie wrote: ↑Fri Sep 24, 2021 11:22 pm1) I totally agree, 1% premium over 30 years is great. I never said otherwise. The investing world is still trying to get people out from under Edward Jones and the like where the take well over 1% in fees(I think they are around 1.7% all in these days). Investing is still a very black art to many. There are whole threads here about SCV being hard to swallow, which was my point.willthrill81 wrote: ↑Fri Sep 24, 2021 6:35 pmCorrect on both counts.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
I personally don't see where 'heartache and emotional pain' fit into the picture. BHs should be long-term investors who aren't phased by having a portfolio that performs differently than the S&P 500. Heck, if someone is worried about 'underperforming the market', they should be far more concerned about their fixed-income holdings than something like SCV.
Around #2 though, the DFA funds which are the longest lived real-world 5 factor funds, if you tilted 100% to SCV, you can eek out a 1.3% premium but I've never seen anyone recommend 100% SCV to anyone. Fama & French used a 50% SCV tilt(If I remember right), Ben Felix, Paul Merriman and the other large 5 factor people never recommend a tilt even approaching 50%, let alone 100% tilt. I know some people claim to be 100% SCV tilt, and maybe a few exist, but I would be very surprised if a financial advisor ever recommended such a thing(I've certainly never seen any publicly recommend anything resembling even a 50% tilt).
I remember one of the big academic 5 factor people did study recently about if SCV premium was dead or not and they concluded not quite dead but 1% seems like high assumptions anymore. I can't remember where to find that study at the moment. Hopefully someone smarter than me has it handy.
So far the 1% excess return is nowhere near what we have in the real world, with real world portfolios people publicly recommend. So while > 1% might be theoretically possible across one's investing lifetime, it's not currently found in peoples portfolios, and even the academics don't seem to suggest more than a 1% premium at best(I could be wrong, but I've never seen a paper expecting anything > 1%).
If everyone is so convinced > 1% return is possible, why are target date retirement funds not using them? None of the LifeStrategy funds(or similar) uses them. Why doesn't Vanguard or other brokerage recommend five factor investing(I've certainly never seen any brokerage recommend anything resembling a five factor portfolio)?
As for heartache and emotional pain, it's obvious that SCV will underperform something like VTI for very long periods of time, there are entire threads on this forum about it. So we have loads of proof that many many people can't stomach a small tilted five factor portfolio, those threads are proof. Of course the same could be said for investors holding VTI and bailing when the going gets rough. It's not a problem unique to the five factor crowd by any means. But to assume it doesn't exist, when there are huge threads all about it, seems disengenious.
Secondly, you act as though it’s now only 1% after a huge outperformance by US TSM. What if the next ten years gets us back to a 40 year premium of 3%? What will we say then? Value was alive and well all along?
Furthermore, the premiums in exUS have been larger, so unless you only invest in US stocks (not advised), you would have captured significantly more than 1%.
The reason target date funds don’t do it is because a combination of two funds with a glide path probably works well enough for the average investor and it’s simple. That does not mean it’s optimal
Paul Merriman recommends 100% SCV for infants as soon as they are born and 50% or more until retirement. His UBH equity portion is half SCV.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: Small Cap Value heads Rejoice !!!
Larry Swederoe recommends 100% SCV for equities
Paul Merriman 100% SCV
Ben Felix (how is this dude considered a leader? He just reposts others works, no unique insights…) anyway, he also blessed 100% SCV
I’m sure there are others as well
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30% AVUV |
30% AVDV |
30% AVES |
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5% QMOM |
5% IMOM |
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0.1% PUTW |
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0.1% BND
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Re: Small Cap Value heads Rejoice !!!
SCV won 100% of overlapping 20-year periods, and something like 80% of overlapping 10’s.zie wrote: ↑Fri Sep 24, 2021 11:22 pm
As for heartache and emotional pain, it's obvious that SCV will underperform something like VTI for very long periods of time, there are entire threads on this forum about it. So we have loads of proof that many many people can't stomach a small tilted five factor portfolio, those threads are proof. Of course the same could be said for investors holding VTI and bailing when the going gets rough. It's not a problem unique to the five factor crowd by any means. But to assume it doesn't exist, when there are huge threads all about it, seems disengenious.
This forum has soooo much disinformation about factors. It’s sort of shocking
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Re: Small Cap Value heads Rejoice !!!
AVUV is under 10x Earnings, 4.5x CF, 1.4x book
AVDV is under 9x Earnings, 4x CF, 1x book
Value growth spread at absurd levels: https://www.yardeni.com/pub/stylegrval.pdf
So AFTER DFA outperformed by 1.3% over it’s lifetime we end up with the largest value growth spread in history.
AVDV is under 9x Earnings, 4x CF, 1x book
Value growth spread at absurd levels: https://www.yardeni.com/pub/stylegrval.pdf
So AFTER DFA outperformed by 1.3% over it’s lifetime we end up with the largest value growth spread in history.
Small/Value/Profitability: |
30% AVUV |
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30% AVES |
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5% QMOM |
5% IMOM |
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0.1% PUTW |
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Re: Small Cap Value heads Rejoice !!!
Buying growth stocks at any price has never worked out in the long run - see the dotcom bubble, or the Nifty Fifty.FiveFactor wrote: ↑Sat Sep 25, 2021 7:04 am AVUV is under 10x Earnings, 4.5x CF, 1.4x book
AVDV is under 9x Earnings, 4x CF, 1x book
Value growth spread at absurd levels: https://www.yardeni.com/pub/stylegrval.pdf
So AFTER DFA outperformed by 1.3% over it’s lifetime we end up with the largest value growth spread in history.
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Re: Small Cap Value heads Rejoice !!!
No. He. Does. Not.
This is a page image of the model portfolio he published in 2004 in The Only Guide to a Winning Investment Strategy You'll Ever Need: The Way Smart Money Invests Today.
The 100% stock "highly aggressive" portfolio is only 15% small-cap value.
If we combine all the small-cap holdings, it is only 15% US small + 15% US small value + 10% international small = 40% small-cap.
If we combine all the value holdings, it is 15% US large value + 15% US small value + 10% international large value = 40% value.
That is not 100% small-cap value.
You feel that "This forum has soooo much disinformation about factors;" please be careful not to add to it.
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.
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Re: Small Cap Value heads Rejoice !!!
No. He. Does. Not.
Paul’s Mutual Fund Recommendations For Vanguard
The 100%-stock "aggressive" portfolio is:
13% small-cap value
13% + 13% + 10% = 36% for all small-cap holdings combined
13% + 20% = 33% for all value holdings combined
Last edited by nisiprius on Sat Sep 25, 2021 12:00 pm, edited 2 times in total.
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Re: Small Cap Value heads Rejoice !!!
Yes, he does. He also said his personal portfolio is 100% SV for equities. The rest of his portfolio are alternatives. He abandond bonds. Posted all of this on the RR forum. You can go search it yourself.
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
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5% QMOM |
5% IMOM |
Volatility: |
0.1% PUTW |
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0.1% BND
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Re: Small Cap Value heads Rejoice !!!
You made the assertion that Swedroe "recommends" 100% SCV, so it's your burden to provide the source. I cited my source and reproduced a page image. It's your turn, please cite the source and quote the actual words in which he "recommends" 100% SCV to others.FiveFactor wrote: ↑Sat Sep 25, 2021 11:54 amYes, he does. He also said his personal portfolio is 100% SV for equities. The rest of his portfolio are alternatives. He abandond bonds. Posted all of this on the RR forum. You can go search it yourself.
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.
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Re: Small Cap Value heads Rejoice !!!
It’s in the RR forum. You are welcome to do your own research. I know the truth, and your opinion of my truth doesn’t matter to me. Thanks.nisiprius wrote: ↑Sat Sep 25, 2021 12:01 pmYou made the assertion that Swedroe "recommends" 100% SCV, so it's your burden to provide the source. I cited my source and reproduced a page image. It's your turn, please cite the source and quote the actual words in which he "recommends" 100% SCV to others.FiveFactor wrote: ↑Sat Sep 25, 2021 11:54 amYes, he does. He also said his personal portfolio is 100% SV for equities. The rest of his portfolio are alternatives. He abandond bonds. Posted all of this on the RR forum. You can go search it yourself.
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
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5% QMOM |
5% IMOM |
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0.1% PUTW |
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0.1% BND
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Re: Small Cap Value heads Rejoice !!!
Alternatively we can ask Larry to answer directly here. That is if bogleheads isn’t still on his ban list.nisiprius wrote: ↑Sat Sep 25, 2021 12:01 pmYou made the assertion that Swedroe "recommends" 100% SCV, so it's your burden to provide the source. I cited my source and reproduced a page image. It's your turn, please cite the source and quote the actual words in which he "recommends" 100% SCV to others.FiveFactor wrote: ↑Sat Sep 25, 2021 11:54 amYes, he does. He also said his personal portfolio is 100% SV for equities. The rest of his portfolio are alternatives. He abandond bonds. Posted all of this on the RR forum. You can go search it yourself.
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
Momentum: |
5% QMOM |
5% IMOM |
Volatility: |
0.1% PUTW |
Term: |
0.1% BND
Re: Small Cap Value heads Rejoice !!!
I think Larry and Paul would both recommend an investor consider their willingness, need, and ability to take risk. They wouldn’t just say “I recommend 100% SCV” to everyone.
Paul absolutely recommends splitting total market funds and SCV, like target date plus SCV or large cap plus SCV. I don’t think 100% SCV is a typical recommendation although he might not outright reject it for every person
Paul absolutely recommends splitting total market funds and SCV, like target date plus SCV or large cap plus SCV. I don’t think 100% SCV is a typical recommendation although he might not outright reject it for every person
Crom laughs at your Four Winds
Re: Small Cap Value heads Rejoice !!!
I mean I think you're probably right in the last two paragraphs but if so that would IMO disprove some of the theoretical underpinnings for why factors should work. The real truth may be as simple as herd psychology which changes over time implying opportunistic not static passive use of factors.Nathan Drake wrote: ↑Fri Sep 24, 2021 9:46 pm 1. Factors allow you to diversify your sources of risk premiums and actually increase your bond allocation, overall leading to similar and more consistent returns with less risk if you desire.
2. You are assuming that the introduction of factor based ETFs will lead to more inflows, increase the valuations, and lessen the risk premia. Let's do a thought experiment: Go to YouTube and search for "S&P 500" or "Ark Invest" and compare that to "Avantis Small Cap Value". Please tell me which gives you greater results/views. Hint: it's not Small Cap Value ETFs.
If what you are arguing is true, then the spreads should not have widened to some of the greatest levels in history at the current moment. That means more money is rushing into index funds and large cap growth stocks than Small Cap Value. And there's an argument to be made that the SCV premium isn't entirely risk based, but behaviorally based. With the advent of social media, it looks like the behavioral issues have actually increased. People know and invest in popular names that have grown tremendously the past decade. They don't know and invest in smaller companies that many haven't even heard of. They're not nearly as exciting at face value.
If anything, the opportunity to capture the risk premiums has never been greater than it is now. And of course, if you backtest from 1993 to 2011, the SCV premium was 3%. So the question is whether mean reversion will occur and SCV will outperform, or is the 1% some true long-term norm? It would be better to backtest in a scenario where starting and ending spreads were at historically normal levels rather than picking dates that may be more advantageous due to outperformance based upon abnormally high or low spreads.
Re: Small Cap Value heads Rejoice !!!
Herding is more likely than the risk-based explanations, as distressed companies have lower than average market returns. The value "risk factor" is just the historic/observable value phenomenon rebranded and shoehorned into the CAPM.
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Re: Small Cap Value heads Rejoice !!!
Can’t time factors just like you can’t time markets, no matter how compelling the spreads look000 wrote: ↑Sat Sep 25, 2021 4:43 pmI mean I think you're probably right in the last two paragraphs but if so that would IMO disprove some of the theoretical underpinnings for why factors should work. The real truth may be as simple as herd psychology which changes over time implying opportunistic not static passive use of factors.Nathan Drake wrote: ↑Fri Sep 24, 2021 9:46 pm 1. Factors allow you to diversify your sources of risk premiums and actually increase your bond allocation, overall leading to similar and more consistent returns with less risk if you desire.
2. You are assuming that the introduction of factor based ETFs will lead to more inflows, increase the valuations, and lessen the risk premia. Let's do a thought experiment: Go to YouTube and search for "S&P 500" or "Ark Invest" and compare that to "Avantis Small Cap Value". Please tell me which gives you greater results/views. Hint: it's not Small Cap Value ETFs.
If what you are arguing is true, then the spreads should not have widened to some of the greatest levels in history at the current moment. That means more money is rushing into index funds and large cap growth stocks than Small Cap Value. And there's an argument to be made that the SCV premium isn't entirely risk based, but behaviorally based. With the advent of social media, it looks like the behavioral issues have actually increased. People know and invest in popular names that have grown tremendously the past decade. They don't know and invest in smaller companies that many haven't even heard of. They're not nearly as exciting at face value.
If anything, the opportunity to capture the risk premiums has never been greater than it is now. And of course, if you backtest from 1993 to 2011, the SCV premium was 3%. So the question is whether mean reversion will occur and SCV will outperform, or is the 1% some true long-term norm? It would be better to backtest in a scenario where starting and ending spreads were at historically normal levels rather than picking dates that may be more advantageous due to outperformance based upon abnormally high or low spreads.
The returns of these stocks are demonstrably higher precisely because they get undervalued and it’s not really all that important to me as to why this occurs
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: Small Cap Value heads Rejoice !!!
And that is a very different statement. Whenever I post my portfolio, I always include the disclaimer that I never recommend anyone else match it. If a portfolio like mine is right for you, then you know enough to ignore that advice.FiveFactor wrote: ↑Sat Sep 25, 2021 11:54 amYes, he does. He also said his personal portfolio is 100% SV for equities. The rest of his portfolio are alternatives. He abandond bonds. Posted all of this on the RR forum. You can go search it yourself.
Re: Small Cap Value heads Rejoice !!!
Wow. What happened to Larry? I would not in my wildest imagination abandon bonds, my gosh of the 4 Alternatives that he recommended here on the forum: one has done well, one was closed and merged into another fund, and the other two have been disappointing. The Alts Larry recommended have not (yet) delivered.FiveFactor wrote: ↑Sat Sep 25, 2021 11:54 amYes, he does. He also said his personal portfolio is 100% SV for equities. The rest of his portfolio are alternatives. He abandond bonds. Posted all of this on the RR forum. You can go search it yourself.
What I would say, not a recommendation, is that if you go the route of Alternatives, limit them to 20% of your portfolio, take half from the Equity side of the portfolio and the other half from the Fixed Income side. That is about all that I would do. I think they are worth considering but the track record of most of them are not impressive.
I wanted to believe the Liquid Alts story, I cheered them on, wished Larry Swedroe and Cliff Asness and AQR and Buckingham well, but it hasn't worked out. My suspicions that the cynical side of me had have proven true despite me wanting to believe.
In a managed account, I still own a Market Neutral Value fund which has been a dog since I owned it, the fund company used to have seven Liquid Alt funds but now are down to only the Market Neutral Fund that I still own. My prediction is that the Market Neutral Fund will close as well. I owned two such Liquid Alt funds starting in August 2019, I am down to one, and my little bit of experience with these type of investments was a very mild disappointment.
There are such investments that seem to be doing relatively well but they are relatively few. Probably Liquid Alts work better with smaller asset bases and with simpler strategies. I have seen several that look pretty good but most have 3-5 year performance records.
Larry Swedroe just wrote a new article that said that Hedge Fund performance has continued to decline as assets in these funds continue to swell. Kind of weird that he recommended Alts that used Hedge Fund like strategies. The article is Hedge Funds: The End of An Era? and is in The Evidence Based Investor, a Google search should pull it up.
A fool and his money are good for business.
Re: Small Cap Value heads Rejoice !!!
Is this the link for the RR forum?FiveFactor wrote: ↑Sat Sep 25, 2021 11:54 amYes, he does. He also said his personal portfolio is 100% SV for equities. The rest of his portfolio are alternatives. He abandond bonds. Posted all of this on the RR forum. You can go search it yourself.
https://community.rationalreminder.ca/login
I can't see anything there without an invitation.
Re: Small Cap Value heads Rejoice !!!
The market has shifted again, I thought 2021 would be a breakout year for Value but since about May it looks like Growth has almost caught up with Value's year to date performance for the year. So Value and Growth and Small and Large have performed in similar fashion so far in 2021. So not sure that the Size and Value factors will continue their trend. We might be back to a Large Growth market. Still, no reason to give up on your Small Cap and Value investments.
A fool and his money are good for business.
Re: Small Cap Value heads Rejoice !!!
Where are you getting this 3%? I've never seen an academic study citing more than 1%.Nathan Drake wrote: ↑Sat Sep 25, 2021 12:03 amThere are reasons to own SCV other than more performance - diversification. 2000-2009 was great for SCV, bad for US TSMzie wrote: ↑Fri Sep 24, 2021 11:22 pm1) I totally agree, 1% premium over 30 years is great. I never said otherwise. The investing world is still trying to get people out from under Edward Jones and the like where the take well over 1% in fees(I think they are around 1.7% all in these days). Investing is still a very black art to many. There are whole threads here about SCV being hard to swallow, which was my point.willthrill81 wrote: ↑Fri Sep 24, 2021 6:35 pmCorrect on both counts.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm1: 1% annually adds up to A LOT over timezie wrote: ↑Fri Sep 24, 2021 3:53 pm
At best, you can hope for about 1%/yr max return above just holding the market (i.e. a Total Market fund like VT/VTI). This isn't nothing, but is it worth the heartache and emotional pain.. Only you can decide that, but it absolutely isn't for the faint of heart.
2: 1% is hardly the best we can hope for. More like on the low side of expected
I personally don't see where 'heartache and emotional pain' fit into the picture. BHs should be long-term investors who aren't phased by having a portfolio that performs differently than the S&P 500. Heck, if someone is worried about 'underperforming the market', they should be far more concerned about their fixed-income holdings than something like SCV.
Around #2 though, the DFA funds which are the longest lived real-world 5 factor funds, if you tilted 100% to SCV, you can eek out a 1.3% premium but I've never seen anyone recommend 100% SCV to anyone. Fama & French used a 50% SCV tilt(If I remember right), Ben Felix, Paul Merriman and the other large 5 factor people never recommend a tilt even approaching 50%, let alone 100% tilt. I know some people claim to be 100% SCV tilt, and maybe a few exist, but I would be very surprised if a financial advisor ever recommended such a thing(I've certainly never seen any publicly recommend anything resembling even a 50% tilt).
I remember one of the big academic 5 factor people did study recently about if SCV premium was dead or not and they concluded not quite dead but 1% seems like high assumptions anymore. I can't remember where to find that study at the moment. Hopefully someone smarter than me has it handy.
So far the 1% excess return is nowhere near what we have in the real world, with real world portfolios people publicly recommend. So while > 1% might be theoretically possible across one's investing lifetime, it's not currently found in peoples portfolios, and even the academics don't seem to suggest more than a 1% premium at best(I could be wrong, but I've never seen a paper expecting anything > 1%).
If everyone is so convinced > 1% return is possible, why are target date retirement funds not using them? None of the LifeStrategy funds(or similar) uses them. Why doesn't Vanguard or other brokerage recommend five factor investing(I've certainly never seen any brokerage recommend anything resembling a five factor portfolio)?
As for heartache and emotional pain, it's obvious that SCV will underperform something like VTI for very long periods of time, there are entire threads on this forum about it. So we have loads of proof that many many people can't stomach a small tilted five factor portfolio, those threads are proof. Of course the same could be said for investors holding VTI and bailing when the going gets rough. It's not a problem unique to the five factor crowd by any means. But to assume it doesn't exist, when there are huge threads all about it, seems disengenious.
Secondly, you act as though it’s now only 1% after a huge outperformance by US TSM. What if the next ten years gets us back to a 40 year premium of 3%? What will we say then? Value was alive and well all along?
Here is some writing from Larry Swedroe about the SCV premium, and he quotes Fama and French concluding it may not exist in the US anymore(paper links in the url). The people that proved the SCV premium are no longer confident it exists in the US market. That's not me saying that, it's Fama and French saying that. I know they are smarter about investing than I am, so I'm not going to doubt them. Clearly you believe they are wrong, I'd love some proof on why you believe they are wrong. You maybe could win a Nobel prize if you can prove them wrong!
Before you say it, yes I know they conclude SCV premium continues to exist in exUS markets, I actually read that article and the linked papers(though I can't say I understood the linked papers).
I'm not against SCV or five factor investing, I'm just saying that nobody can prove even 1% extra returns is expected anymore, so 1% extra is probably the BEST CASE for 5 factor investing. I personally hold SCV (though nowhere near 100%). But there is zero chance I'd ever recommend SCV to anyone that's not clearly sold on it already.
I agree diversification of returns is one possible reason to hold some SCV even if one is not confident the premium will continue to exist.
Thanks for the Paul Merriman information, that's surprising that he publicly recommends 50% SCV even!Nathan Drake wrote: ↑Sat Sep 25, 2021 12:03 am
Furthermore, the premiums in exUS have been larger, so unless you only invest in US stocks (not advised), you would have captured significantly more than 1%.
The reason target date funds don’t do it is because a combination of two funds with a glide path probably works well enough for the average investor and it’s simple. That does not mean it’s optimal
Paul Merriman recommends 100% SCV for infants as soon as they are born and 50% or more until retirement. His UBH equity portion is half SCV.
As for ex-US, Historically, in the past century, the US has something like a 2% premium over the rest of the world(I sadly can't find the source for that at the moment). I personally would be pretty surprised if that continues over the next century, but I don't fault people for thinking it will continue. PV shows US-TSM has an almost 4% premium over exUS, since 1986(as far back as PV goes). I'm not sure why you think exUS premiums are larger than US or even SCV, that's clearly not been the case, according to PV.
Anyways, like I said, I'm not against factor investing, but I 100% agree that people get so confused about the five factors. They are not yet written in stone, and they are a very hard thing to invest in(funds are complicated and hard to find cheap, etc).
So I'm going to continue with my academically proven understanding that most five factor believers are misguided at best. It's not a proven magic extra return bullet, though it might be. I continue to believe Fama and French. Everything I said in my original definition of five factor I imagine Fama and French would agree with, since I mostly just paraphrased their work, but I'm happy to be proven wrong. It's very possible I've made a mistake, but I'm not currently convinced of that.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
Re: Small Cap Value heads Rejoice !!!
I included him, because he is very well known in the Five Factor community. Though, I completely agree with you, he is not an academic himself, he happily quotes and paraphrases academic works for those of us to ignorant or lazy to understand the academic works. While he maybe blessed other people owning 100% SCV, his public portfolio recommendation is nowhere near even 50% SCV.FiveFactor wrote: ↑Sat Sep 25, 2021 5:47 amLarry Swederoe recommends 100% SCV for equities
Paul Merriman 100% SCV
Ben Felix (how is this dude considered a leader? He just reposts others works, no unique insights…) anyway, he also blessed 100% SCV
I’m sure there are others as well
I'll leave the Larry and Paul comments to what has already been said by others.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
Re: Small Cap Value heads Rejoice !!!
zie wrote: ↑Sat Sep 25, 2021 10:38 pmWhere are you getting this 3%? I've never seen an academic study citing more than 1%.Nathan Drake wrote: ↑Sat Sep 25, 2021 12:03 amThere are reasons to own SCV other than more performance - diversification. 2000-2009 was great for SCV, bad for US TSMzie wrote: ↑Fri Sep 24, 2021 11:22 pm1) I totally agree, 1% premium over 30 years is great. I never said otherwise. The investing world is still trying to get people out from under Edward Jones and the like where the take well over 1% in fees(I think they are around 1.7% all in these days). Investing is still a very black art to many. There are whole threads here about SCV being hard to swallow, which was my point.willthrill81 wrote: ↑Fri Sep 24, 2021 6:35 pmCorrect on both counts.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm
1: 1% annually adds up to A LOT over time
2: 1% is hardly the best we can hope for. More like on the low side of expected
I personally don't see where 'heartache and emotional pain' fit into the picture. BHs should be long-term investors who aren't phased by having a portfolio that performs differently than the S&P 500. Heck, if someone is worried about 'underperforming the market', they should be far more concerned about their fixed-income holdings than something like SCV.
Around #2 though, the DFA funds which are the longest lived real-world 5 factor funds, if you tilted 100% to SCV, you can eek out a 1.3% premium but I've never seen anyone recommend 100% SCV to anyone. Fama & French used a 50% SCV tilt(If I remember right), Ben Felix, Paul Merriman and the other large 5 factor people never recommend a tilt even approaching 50%, let alone 100% tilt. I know some people claim to be 100% SCV tilt, and maybe a few exist, but I would be very surprised if a financial advisor ever recommended such a thing(I've certainly never seen any publicly recommend anything resembling even a 50% tilt).
I remember one of the big academic 5 factor people did study recently about if SCV premium was dead or not and they concluded not quite dead but 1% seems like high assumptions anymore. I can't remember where to find that study at the moment. Hopefully someone smarter than me has it handy.
So far the 1% excess return is nowhere near what we have in the real world, with real world portfolios people publicly recommend. So while > 1% might be theoretically possible across one's investing lifetime, it's not currently found in peoples portfolios, and even the academics don't seem to suggest more than a 1% premium at best(I could be wrong, but I've never seen a paper expecting anything > 1%).
If everyone is so convinced > 1% return is possible, why are target date retirement funds not using them? None of the LifeStrategy funds(or similar) uses them. Why doesn't Vanguard or other brokerage recommend five factor investing(I've certainly never seen any brokerage recommend anything resembling a five factor portfolio)?
As for heartache and emotional pain, it's obvious that SCV will underperform something like VTI for very long periods of time, there are entire threads on this forum about it. So we have loads of proof that many many people can't stomach a small tilted five factor portfolio, those threads are proof. Of course the same could be said for investors holding VTI and bailing when the going gets rough. It's not a problem unique to the five factor crowd by any means. But to assume it doesn't exist, when there are huge threads all about it, seems disengenious.
Secondly, you act as though it’s now only 1% after a huge outperformance by US TSM. What if the next ten years gets us back to a 40 year premium of 3%? What will we say then? Value was alive and well all along?
Here is some writing from Larry Swedroe about the SCV premium, and he quotes Fama and French concluding it may not exist in the US anymore(paper links in the url). The people that proved the SCV premium are no longer confident it exists in the US market. That's not me saying that, it's Fama and French saying that. I know they are smarter about investing than I am, so I'm not going to doubt them. Clearly you believe they are wrong, I'd love some proof on why you believe they are wrong. You maybe could win a Nobel prize if you can prove them wrong!
Before you say it, yes I know they conclude SCV premium continues to exist in exUS markets, I actually read that article and the linked papers(though I can't say I understood the linked papers).
I'm not against SCV or five factor investing, I'm just saying that nobody can prove even 1% extra returns is expected anymore, so 1% extra is probably the BEST CASE for 5 factor investing. I personally hold SCV (though nowhere near 100%). But there is zero chance I'd ever recommend SCV to anyone that's not clearly sold on it already.
I agree diversification of returns is one possible reason to hold some SCV even if one is not confident the premium will continue to exist.
Thanks for the Paul Merriman information, that's surprising that he publicly recommends 50% SCV even!Nathan Drake wrote: ↑Sat Sep 25, 2021 12:03 am
Furthermore, the premiums in exUS have been larger, so unless you only invest in US stocks (not advised), you would have captured significantly more than 1%.
The reason target date funds don’t do it is because a combination of two funds with a glide path probably works well enough for the average investor and it’s simple. That does not mean it’s optimal
Paul Merriman recommends 100% SCV for infants as soon as they are born and 50% or more until retirement. His UBH equity portion is half SCV.
As for ex-US, Historically, in the past century, the US has something like a 2% premium over the rest of the world(I sadly can't find the source for that at the moment). I personally would be pretty surprised if that continues over the next century, but I don't fault people for thinking it will continue. PV shows US-TSM has an almost 4% premium over exUS, since 1986(as far back as PV goes). I'm not sure why you think exUS premiums are larger than US or even SCV, that's clearly not been the case, according to PV.
Anyways, like I said, I'm not against factor investing, but I 100% agree that people get so confused about the five factors. They are not yet written in stone, and they are a very hard thing to invest in(funds are complicated and hard to find cheap, etc).
So I'm going to continue with my academically proven understanding that most five factor believers are misguided at best. It's not a proven magic extra return bullet, though it might be. I continue to believe Fama and French. Everything I said in my original definition of five factor I imagine Fama and French would agree with, since I mostly just paraphrased their work, but I'm happy to be proven wrong. It's very possible I've made a mistake, but I'm not currently convinced of that.
I think you’re somewhat mischaracterizing their findings:
“ Specifically, they found the premium for large value stocks dropped from 0.36 percent per month to just 0.05 percent, while premiums for small value stocks fell from 0.58 percent per month to 0.33 percent. A 0.33 percent monthly premium is certainly economically significant. However, it was not statistically significant at the 5 percent confidence level (t-stat =1.5). While it seems that the value premium may have died in large caps, with a 0.33 percent premium in small value stocks, it seems hard to declare the patient dead. Fama and French added that increasing the sample size to the full period showed a statistically significant value premium for both the overall market and for small value stocks-the full-period average monthly premiums of market value and small value were 0.26 percent (t-stat=2.4) and 0.45 percent (t-stat = 3.2) per month, respectively.”
The next paragraph then suggests that the best measurement is to use the full sample, so the 0.45% monthly premium is the observed value.
Out of sample, the result does not reject the hypothesis that the premium is unchanged from the original publication.
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Re: Small Cap Value heads Rejoice !!!
This seems to misinterpret what Larry and others are saying. If FF didn’t believe in the persistence of factor funds they wouldn’t be endorsing them, so you are taking comments out of contextzie wrote: ↑Sat Sep 25, 2021 10:38 pmWhere are you getting this 3%? I've never seen an academic study citing more than 1%.Nathan Drake wrote: ↑Sat Sep 25, 2021 12:03 amThere are reasons to own SCV other than more performance - diversification. 2000-2009 was great for SCV, bad for US TSMzie wrote: ↑Fri Sep 24, 2021 11:22 pm1) I totally agree, 1% premium over 30 years is great. I never said otherwise. The investing world is still trying to get people out from under Edward Jones and the like where the take well over 1% in fees(I think they are around 1.7% all in these days). Investing is still a very black art to many. There are whole threads here about SCV being hard to swallow, which was my point.willthrill81 wrote: ↑Fri Sep 24, 2021 6:35 pmCorrect on both counts.FiveFactor wrote: ↑Fri Sep 24, 2021 6:31 pm
1: 1% annually adds up to A LOT over time
2: 1% is hardly the best we can hope for. More like on the low side of expected
I personally don't see where 'heartache and emotional pain' fit into the picture. BHs should be long-term investors who aren't phased by having a portfolio that performs differently than the S&P 500. Heck, if someone is worried about 'underperforming the market', they should be far more concerned about their fixed-income holdings than something like SCV.
Around #2 though, the DFA funds which are the longest lived real-world 5 factor funds, if you tilted 100% to SCV, you can eek out a 1.3% premium but I've never seen anyone recommend 100% SCV to anyone. Fama & French used a 50% SCV tilt(If I remember right), Ben Felix, Paul Merriman and the other large 5 factor people never recommend a tilt even approaching 50%, let alone 100% tilt. I know some people claim to be 100% SCV tilt, and maybe a few exist, but I would be very surprised if a financial advisor ever recommended such a thing(I've certainly never seen any publicly recommend anything resembling even a 50% tilt).
I remember one of the big academic 5 factor people did study recently about if SCV premium was dead or not and they concluded not quite dead but 1% seems like high assumptions anymore. I can't remember where to find that study at the moment. Hopefully someone smarter than me has it handy.
So far the 1% excess return is nowhere near what we have in the real world, with real world portfolios people publicly recommend. So while > 1% might be theoretically possible across one's investing lifetime, it's not currently found in peoples portfolios, and even the academics don't seem to suggest more than a 1% premium at best(I could be wrong, but I've never seen a paper expecting anything > 1%).
If everyone is so convinced > 1% return is possible, why are target date retirement funds not using them? None of the LifeStrategy funds(or similar) uses them. Why doesn't Vanguard or other brokerage recommend five factor investing(I've certainly never seen any brokerage recommend anything resembling a five factor portfolio)?
As for heartache and emotional pain, it's obvious that SCV will underperform something like VTI for very long periods of time, there are entire threads on this forum about it. So we have loads of proof that many many people can't stomach a small tilted five factor portfolio, those threads are proof. Of course the same could be said for investors holding VTI and bailing when the going gets rough. It's not a problem unique to the five factor crowd by any means. But to assume it doesn't exist, when there are huge threads all about it, seems disengenious.
Secondly, you act as though it’s now only 1% after a huge outperformance by US TSM. What if the next ten years gets us back to a 40 year premium of 3%? What will we say then? Value was alive and well all along?
Here is some writing from Larry Swedroe about the SCV premium, and he quotes Fama and French concluding it may not exist in the US anymore(paper links in the url). The people that proved the SCV premium are no longer confident it exists in the US market. That's not me saying that, it's Fama and French saying that. I know they are smarter about investing than I am, so I'm not going to doubt them. Clearly you believe they are wrong, I'd love some proof on why you believe they are wrong. You maybe could win a Nobel prize if you can prove them wrong!
Before you say it, yes I know they conclude SCV premium continues to exist in exUS markets, I actually read that article and the linked papers(though I can't say I understood the linked papers).
I'm not against SCV or five factor investing, I'm just saying that nobody can prove even 1% extra returns is expected anymore, so 1% extra is probably the BEST CASE for 5 factor investing. I personally hold SCV (though nowhere near 100%). But there is zero chance I'd ever recommend SCV to anyone that's not clearly sold on it already.
I agree diversification of returns is one possible reason to hold some SCV even if one is not confident the premium will continue to exist.
Thanks for the Paul Merriman information, that's surprising that he publicly recommends 50% SCV even!Nathan Drake wrote: ↑Sat Sep 25, 2021 12:03 am
Furthermore, the premiums in exUS have been larger, so unless you only invest in US stocks (not advised), you would have captured significantly more than 1%.
The reason target date funds don’t do it is because a combination of two funds with a glide path probably works well enough for the average investor and it’s simple. That does not mean it’s optimal
Paul Merriman recommends 100% SCV for infants as soon as they are born and 50% or more until retirement. His UBH equity portion is half SCV.
As for ex-US, Historically, in the past century, the US has something like a 2% premium over the rest of the world(I sadly can't find the source for that at the moment). I personally would be pretty surprised if that continues over the next century, but I don't fault people for thinking it will continue. PV shows US-TSM has an almost 4% premium over exUS, since 1986(as far back as PV goes). I'm not sure why you think exUS premiums are larger than US or even SCV, that's clearly not been the case, according to PV.
Anyways, like I said, I'm not against factor investing, but I 100% agree that people get so confused about the five factors. They are not yet written in stone, and they are a very hard thing to invest in(funds are complicated and hard to find cheap, etc).
So I'm going to continue with my academically proven understanding that most five factor believers are misguided at best. It's not a proven magic extra return bullet, though it might be. I continue to believe Fama and French. Everything I said in my original definition of five factor I imagine Fama and French would agree with, since I mostly just paraphrased their work, but I'm happy to be proven wrong. It's very possible I've made a mistake, but I'm not currently convinced of that.
Applying similar logic, nobody can prove the market factor exists during a period it underperforms tbills, which is quite often.
The same phehomen that occurs with SCV over Market beta occurs with market beta over risk free rate and nobody claims it’s dead due to a few years of outperformance by the risk free rate.
The point of these articles is just to state that while the premiums of 4% have occurred over a long sample size, they are also prone to long periods of having premiums much smaller. Using end dates and shifting the period by only a few years can dramatically influence the results. This doesn’t mean value is dead.
My comment about exUS SCV premiums was relative to their own market. In other words, there has been a big premium of exUS SCV over exUS TSM. This showcases the pervasiveness of the factors that many ignore. The US SCV market having a 1% premium is not indicative of a premium a globally diversified factor investor would have experienced
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: Small Cap Value heads Rejoice !!!
You're right he doesn't necessarily "recommend" it, but FiveFactor is also partly right because the portfolio known as the 'Larry portfolio' has all equity in SCV. One of the books that explains the 'Larry portfolio' and who it's suited for is Reducing the risk of black swans.nisiprius wrote: ↑Sat Sep 25, 2021 12:01 pm You made the assertion that Swedroe "recommends" 100% SCV, so it's your burden to provide the source. I cited my source and reproduced a page image. It's your turn, please cite the source and quote the actual words in which he "recommends" 100% SCV to others.
My take: Ben Felix is a bright guy who publishes high quality videos and podcasts. FiveFactor got banned by Ben Felix from the RR forum. He was an active member there but got in a few 'fights'. In my opinion this is relevant context to understand some of his posts. And yes I certainly agree that Felix doesn't actively recommend 100% SCV. He's actually been quite skeptical of it.zie wrote: ↑Sat Sep 25, 2021 10:53 pm I included him, because he is very well known in the Five Factor community. Though, I completely agree with you, he is not an academic himself, he happily quotes and paraphrases academic works for those of us to ignorant or lazy to understand the academic works. While he maybe blessed other people owning 100% SCV, his public portfolio recommendation is nowhere near even 50% SCV.
I'll leave the Larry and Paul comments to what has already been said by others.
Re: Small Cap Value heads Rejoice !!!
The factor eggheads never give Low Vol a fair shake but unless I'm mistaken, each successive low vol decile has a higher Sharpe, or at least an appreciably lower drawdown, so technically they should be recommending 100% Low Vol portfolios for many investors, or something optimal like 50% Low Vol 50% SCV.
Amateur Self-Taught Senior Macro Strategist
Re: Small Cap Value heads Rejoice !!!
QVAL & ZIG can't catch a break, they look about as deep value-y as AVUV, but AVUV has beaten those two & the more mainstream SCV ETFs. Maybe it literally is the Small Cap effect, QVAL is full of well-known stinkers which the market has correctly assessed. Average QVAL EV/EBIT is 8.3, I doubt AVUV is cheaper.
Amateur Self-Taught Senior Macro Strategist