Is it foolish to go all in Small Cap Value?

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

Post by investyoumust »

muffins14 wrote: Thu Jan 20, 2022 11:27 am
Yes, thus you recently paid an opportunity cost of you held no large cap growth. Had you held both, you could have been selling LCG and buying SCV to rebalance
But what if long-term LCG becomes a drag on performance?
One More Thing
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Re: Is it foolish to go all in Small Cap Value?

Post by One More Thing »

investyoumust wrote: Thu Jan 20, 2022 6:47 am
I see. Still, this reduces your overall exposure to these factors, and I don't know whether you can accurately time these things.
Look at any non-100% allocation as allocating x% of your portfolio to that risk factor. All money allocated in that direction will have the full compounded, annual return of the factor. If you have 10% exposure you will not capture only 1.37%* within your portfolio. What is happening is that 10% of your portfolio will compound at 13.7%**.

* 10% of SCV's annual return of 13.7%**.
** According to historical data. Past is not prologue.
mikejuss
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 11:30 am
mikejuss wrote: Thu Jan 20, 2022 11:26 am I think this is the thing that most posters here are trying to tell you is foolhardy.
So why is there so much high-fiving when someone says he is "VTSAX and chill". That's also a portfolio that can underperform inflation for decades. I get it, there is no tracking error regret, but there is good evidence that some parts of the market are expected to have higher returns, and even if not, they aren't expected to underperform the market durably.
Because, among equity index funds, VTSAX represents a kind of one-size-fits-all sweet spot that captures gains across a variety factors. There's definitely an opportunity cost to being spread so thin, but the fund is good for most investors, for whom it is not advisable to be monkeying around with factors. Clearly, you feel very strongly about small-cap value--about it not significantly underperforming VTSAX and also quite possibly outperforming it--but you may be the exception that proves the rule.
Last edited by mikejuss on Thu Jan 20, 2022 11:57 am, edited 1 time in total.
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One More Thing
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Re: Is it foolish to go all in Small Cap Value?

Post by One More Thing »

investyoumust wrote: Thu Jan 20, 2022 11:32 am
muffins14 wrote: Thu Jan 20, 2022 11:27 am
Yes, thus you recently paid an opportunity cost of you held no large cap growth. Had you held both, you could have been selling LCG and buying SCV to rebalance
But what if long-term LCG becomes a drag on performance?
A TSM fund will shift away from LCG if it lags in the market in the same way that it currently shifted away from LCV.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

One More Thing wrote: Thu Jan 20, 2022 11:54 am
A TSM fund will shift away from LCG if it lags in the market in the same way that it currently shifted away from LCV.
No, a TSM fund always has an equal split between value and growth (by definition).
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Re: Is it foolish to go all in Small Cap Value?

Post by Morse Code »

mikejuss wrote: Thu Jan 20, 2022 10:09 am
Morse Code wrote: Thu Jan 20, 2022 10:02 am
mikejuss wrote: Thu Jan 20, 2022 9:47 am...But you do realize that the reason very few Bogleheads recommend factor investing is that it has been demonstrated that most investors do not have the stomach to see such a plan through across 4 decades, right?
Why would anyone care what most investors do not have the stomach for? Tracking error is a behavioral mistake that is 100% avoidable.
Um, because it might turn out that you're not unlike most investors.
Just who exactly are these investors you speak of and how was it demonstrated they didn't see their plans through? They sound kind of like strawmen to me.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Morse Code wrote: Thu Jan 20, 2022 11:57 am Just who exactly are these investors you speak of and how was it demonstrated they didn't see their plans through? They sound kind of like strawmen to me.
It seems to me that many people don't accept the idea that there could be a way to get higher returns than the market, when even the man who proposed efficient markets himself, Gene Fama, believes there is more to investing than just owning the total stock market.
One More Thing
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Re: Is it foolish to go all in Small Cap Value?

Post by One More Thing »

investyoumust wrote: Thu Jan 20, 2022 11:56 am
One More Thing wrote: Thu Jan 20, 2022 11:54 am
A TSM fund will shift away from LCG if it lags in the market in the same way that it currently shifted away from LCV.
No, a TSM fund always has an equal split between value and growth (by definition).
More accurately the definitions of high multiples and low multiples changes relative to the market. What is LCG today can become LCV tomorrow by comparison and vice versa.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

One More Thing wrote: Thu Jan 20, 2022 12:08 pm More accurately the definitions of high multiples and low multiples changes relative to the market. What is LCG today can become LCV tomorrow by comparison and vice versa.
Exactly. It's all about relative valuations.
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Re: Is it foolish to go all in Small Cap Value?

Post by Morik »

Here is a toy example demonstrating what my understanding of risk vs return is. If this is wrong I'd be happy to be corrected.

Invest $10k for X years.
Investment A: Expected range of final value is $100k-$120k.
Expected value: $110k
Deviation: $10k

Investment B: Expected range of final value is $80k-$150k
Expected value: $115k
Deviation: $35k

Investment C: Expected range of final value is $20k-$250k
Expected value: $135k
Deviation: $115k

Investment B has higher risk and higher expected return than A. Investment C has higher risk & expected return than B.

Someone saying they want the highest expected value and going with investment C needs to understand that the higher risk means that they could potentially end up less, potentially far less than the other investments that had lower 'expected' value.



Is my understanding correct? "Risk" isn't just 'how bumpy is the ride", but also "the ride could go off the road and crash". The expected return is higher, but the actual return is a much broader range.
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Re: Is it foolish to go all in Small Cap Value?

Post by Morse Code »

investyoumust wrote: Thu Jan 20, 2022 12:06 pm
Morse Code wrote: Thu Jan 20, 2022 11:57 am Just who exactly are these investors you speak of and how was it demonstrated they didn't see their plans through? They sound kind of like strawmen to me.
It seems to me that many people don't accept the idea that there could be a way to get higher returns than the market, when even the man who proposed efficient markets himself, Gene Fama, believes there is more to investing than just owning the total stock market.
I have never bought the argument that I should base my asset allocation on other people's alleged behavioral mistakes due to some arbitrary benchmark.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Morik wrote: Thu Jan 20, 2022 12:17 pm Here is a toy example demonstrating what my understanding of risk vs return is. If this is wrong I'd be happy to be corrected.

Invest $10k for X years.
Investment A: Expected range of final value is $100k-$120k.
Expected value: $110k
Deviation: $10k

Investment B: Expected range of final value is $80k-$150k
Expected value: $115k
Deviation: $35k

Investment C: Expected range of final value is $20k-$250k
Expected value: $135k
Deviation: $115k

Investment B has higher risk and higher expected return than A. Investment C has higher risk & expected return than B.

Someone saying they want the highest expected value and going with investment C needs to understand that the higher risk means that they could potentially end up less, potentially far less than the other investments that had lower 'expected' value.



Is my understanding correct? "Risk" isn't just 'how bumpy is the ride", but also "the ride could go off the road and crash". The expected return is higher, but the actual return is a much broader range.
What if I tell you that over a 10-year period, small stocks are more likely to beat big stock, value stocks are more likely to beat growth stocks and more profitable stocks are more likely to beat less profitable stocks.

If you want to be relatively sure to have more money in ten years, wouldn't it be less risky to make those odds work in your favor?
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burritoLover
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

investyoumust wrote: Thu Jan 20, 2022 10:51 am
burritoLover wrote: Thu Jan 20, 2022 10:44 am Sure, since you are in your twenties, if you contribute regularly at a high enough rate so that even if you end up with a negative premium you will still have a decent retirement (and not run out of money) and you make no changes over 40 years even if SCV drops 80% or even if the market is outperforming you over decades, then, yeah, you'll probably be fine. Who has the robot-like nerves of steel to do that? Virtually no one. Not only that, you have to prevent yourself from changing your portfolio every time new academic information comes along - even when that information shows your prior portfolio selection was misguided.
I appreciate you listing all those behavioral pitfalls.

As far as new academic evidence goes, since the Fama French 3 factor model was released 30 years ago not much has changed. Sure, there has been the addition of profitability (and investment, although it's not that important), but virtually every small cap value fund implicitly includes profitability by screening for earnings and cashflow, in addition to book value.

Even Fama has said that there isn't much more room for improvement, since every new variable only adds very little, when you account for the variables already in the model.
Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (1) Adding an explanatory variable can attenuate the slopes in a regression. (2) Adding a variable with marginal explanatory power always attenuates the values of other explanatory variables in the extremes of a regression’s fitted values. Without a restriction on portfolio weights, the maximum Sharpe ratios in the GRS statistic of Gibbons, Ross, and Shanken (1989) provide little information about an incremental variable’s impact on the portfolio opportunity set.
https://papers.ssrn.com/sol3/papers.cfm ... id=2509517
You are misinterpreting what is being said there - it means there's no room for improvement for this model (which is a model based on past data). The model could be completely useless going forward and that statement would still make sense. Finance is not a physical science.
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Re: Is it foolish to go all in Small Cap Value?

Post by SpookyKG »

Yes, it is foolish to go all in on one strategy you read about when there are many strategies.

It is unlikely that 100% of one thing meets an 'efficient frontier' of investing. It seems likely that even 20% VTSAX and 80% SCV is likely to have better risk-adjusted returns - that required almost zero thought.

In investing, going all in on one thing is rarely the 'best option', so yes, it is foolish to think one strategy of infinite strategies is worth 100% of your money for 100% of your investing career.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 12:23 pm You are misinterpreting what is being said there - it means there's no room for improvement for this model (which is a model based on past data). The model could be completely useless going forward and that statement would still make sense. Finance is not a physical science.
I understand that. But isn't it a bit nihilistic to think we can't learn anything from centuries of stock market data in dozens of countries?
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Re: Is it foolish to go all in Small Cap Value?

Post by Morik »

investyoumust wrote: Thu Jan 20, 2022 12:21 pm
Morik wrote: Thu Jan 20, 2022 12:17 pm Here is a toy example demonstrating what my understanding of risk vs return is. If this is wrong I'd be happy to be corrected.

Invest $10k for X years.
Investment A: Expected range of final value is $100k-$120k.
Expected value: $110k
Deviation: $10k

Investment B: Expected range of final value is $80k-$150k
Expected value: $115k
Deviation: $35k

Investment C: Expected range of final value is $20k-$250k
Expected value: $135k
Deviation: $115k

Investment B has higher risk and higher expected return than A. Investment C has higher risk & expected return than B.

Someone saying they want the highest expected value and going with investment C needs to understand that the higher risk means that they could potentially end up less, potentially far less than the other investments that had lower 'expected' value.



Is my understanding correct? "Risk" isn't just 'how bumpy is the ride", but also "the ride could go off the road and crash". The expected return is higher, but the actual return is a much broader range.
What if I tell you that over a 10-year period, small stocks are more likely to beat big stock, value stocks are more likely to beat growth stocks and more profitable stocks are more likely to beat less profitable stocks.

If you want to be relatively sure to have more money in ten years, wouldn't it be less risky to make those odds work in your favor?
From my toy example, isn't it a true statement that over the next X year period, investment C's expected return is higher than investments A & B?
Does this mean that if your goal is to maximize the amount of money you have after X, investment C is hands down the best option?

What if you will starve to death if you don't have at least $50k in X years? So now you have two goals: Don't starve to death, and without starving to death have as much money as you can in X years.
Investment B looks pretty good to me in that case... and I wouldn't go for investment C.

My point is that the expected return doesn't tell the full story. Just because the expected value is higher doesn't mean you will end up with more money--you also need to look at the risks. Are you ok taking on more risk, understanding that the increased risk could result in you having a lot less money in the end? Statistically you expect to end up with more money, but actual results can fall anywhere along the spectrum...
Last edited by Morik on Thu Jan 20, 2022 12:32 pm, edited 1 time in total.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

SpookyKG wrote: Thu Jan 20, 2022 12:27 pm Yes, it is foolish to go all in on one strategy you read about when there are many strategies.

It is unlikely that 100% of one thing meets an 'efficient frontier' of investing. It seems likely that even 20% VTSAX and 80% SCV is likely to have better risk-adjusted returns - that required almost zero thought.

In investing, going all in on one thing is rarely the 'best option', so yes, it is foolish to think one strategy of infinite strategies is worth 100% of your money for 100% of your investing career.
I don't care about risk-adjusted returns. Bonds have better risk-adjusted returns than stocks, but young investors should still hold stocks. Gene Fama thinks Small Cap Value is still an efficient portfolio.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

Morse Code wrote: Thu Jan 20, 2022 11:57 am
mikejuss wrote: Thu Jan 20, 2022 10:09 am
Morse Code wrote: Thu Jan 20, 2022 10:02 am
mikejuss wrote: Thu Jan 20, 2022 9:47 am...But you do realize that the reason very few Bogleheads recommend factor investing is that it has been demonstrated that most investors do not have the stomach to see such a plan through across 4 decades, right?
Why would anyone care what most investors do not have the stomach for? Tracking error is a behavioral mistake that is 100% avoidable.
Um, because it might turn out that you're not unlike most investors.
Just who exactly are these investors you speak of and how was it demonstrated they didn't see their plans through? They sound kind of like strawmen to me.
Financial advisers talk about them all the time. They didn't see their plans through because they sold their equity positions when the market tanked (or when their positions went sideways for a long time).

Let me guess: you too are 20 years old? It's funny that you think behavioral errors are easily avoided or unfathomable. Experience will teach you otherwise. :D
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Tom_T
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Re: Is it foolish to go all in Small Cap Value?

Post by Tom_T »

I love threads like this. It will start with a question like 'should I do x?', then a bunch of people say "no, don't do x", and the OP says "but I really want to do x" and sometimes "you're wrong for telling me not to do x." So, go ahead! :)
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Re: Is it foolish to go all in Small Cap Value?

Post by onourway »

investyoumust wrote: Thu Jan 20, 2022 11:17 am
muffins14 wrote: Thu Jan 20, 2022 11:09 am
Yes, but you get to choose how much you load on the value factor.

You are saying 100% SCV. I am suggesting 30-50% SCV instead. Who knows what’s going to be better over your observation window and withdrawal patterns? Check back here in 50 years
Nobody knows that stocks are going to beat bonds. Yet still most young investors are advised to go 100% stocks, or something close to that. The opportunity cost is just too high.
That's because historically speaking, stocks have provided roughly double the CAGR of bonds over the long run. 100% stocks vs. 100% bonds is, over most periods, the difference between being able to save enough for a comfortable retirement, and not. On the other hand, the difference between SCV and total market is insignificantly small; it's the difference between having a comfortable retirement or having a slightly more comfortable retirement. It's not enough to move the needle much one way or another, and thus, not worth decades of second guessing yourself and putting yourself in the position to make behavioral errors that are significantly more costly.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Tom_T wrote: Thu Jan 20, 2022 12:40 pm I love threads like this. It will start with a question like 'should I do x?', then a bunch of people say "no, don't do x", and the OP says "but I really want to do x" and sometimes "you're wrong for telling me not to do x." So, go ahead! :)
I also love how different groups of people have a different perception of reality.

When I ask the question "should i go all in VTWAX" in the rational reminder community, i get "oh, no you have all your eggs in one basket", "you need to diversify across risk factors", "you are stupid for believing in the market risk premium but not the other risk premiums".

It's really a result of people choosing to self-select the communities they want to belong to, and each community has its own set of widely accepted "truths".
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burritoLover
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

investyoumust wrote: Thu Jan 20, 2022 12:28 pm
burritoLover wrote: Thu Jan 20, 2022 12:23 pm You are misinterpreting what is being said there - it means there's no room for improvement for this model (which is a model based on past data). The model could be completely useless going forward and that statement would still make sense. Finance is not a physical science.
I understand that. But isn't it a bit nihilistic to think we can't learn anything from centuries of stock market data in dozens of countries?
Well, first of all, there's not centuries of data. You only have three 30-year periods for US data. Not even two really for ex-US. And those 30-year periods have had vastly different characteristics. There simply isn't enough data to reasonably predict the next 30 years. You wouldn't have even heard of factors at the end of the previous 30 year block, which goes to show you how little data we have. Unless you think the last 30 years magically was the tipping point and we suddenly know everything there is to know and nothing that we know can change.
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Re: Is it foolish to go all in Small Cap Value?

Post by garlandwhizzer »

We simply don't know with certainty whether SCV will ultimately and reliably outperform TSM up front. Nor do know how long ultimately will turn out to be. And finally even if SCV does ultimately outperform, will it do so in a risk adjusted manner? Many factor experts including Dr. Fama believe that SCV's excess expected return is merely the long term reward for patiently tolerating more expected volatility and deeper drawdowns in bear markets. in short the same expected results might be achieved by increasing TSM's relative weight to bonds in the overall portfolio.

It's a complex question and the answer that each of us chooses has more to do with our own beliefs and opinions than with any reliable certainty about future returns. Personally, I do not have sufficient faith in artificial factor models themselves which make numerous totally unrealistic assumptions to go 100% SCV. I believe that the long term past history of SCV outperformance will not be a strict replay in the future for many reasons. 1929 - 1992 our economy was bricks and mortar/manufacturing (value sectors) whereas now it is dominated by information economy/tech (growth sectors) that tend to disrupt and destroy bricks and mortar. Also economic growth, interest rates, and inflation in 1929 - 1992 were substantial and robust, a macroeconomic background favorable to value sectors. Since 2007, we've had (until very recently) very low inflation, zero rates, and sluggish economic growth, a macroeconomic background favorable to growth stocks. Hence LCG dominated that period. How long current inflation will persist, the direction of interest rates, and how robust economic growth will be in the future will have a lot to do with whether LSG or SCV thrives more going forward at least iMO. Most of 1929 -1992 there was a macroeconomic background favorable to SCV and it backtested beautifully. 2007 - 2022 the opposite was the case. I think that it is likely that after supply and labor bottlenecks fade away there is a good chance that we'll return to the 2007 - 2022 scenario in which case LSG is not going to collapse the way it did 2000 - 2003.

In addition the market has changed dramatically in recent decades. It used to be dominated by unsophisticated mom and pop investors and SCV stocks were consistently overlooked and selling at fire sale prices. They're a lot cheaper than LCG now, but not the screaming buys they once were. Now all the SCV funds, trading algorithms, and professional managers scrutinizing the SCV space vigorously and snap up bargains. Put simply, there's a lot less alpha to harvest now and a lot more sophisticated investors seeking to harvest it. Don't expect the 1929 - 1992 SCV gravy train premiums going forward.

While I would not use 100% SCV due to what I believe to be the inherent uncertainty of the future, i do personally hold 25% SCV/75% TSM to cover both bases. I view TSM, not SCV, as the best single default position. I have no problem with those who choose 100% TSM which I believe will offer excellent risk adjusted returns as it always has over long periods of time. I do believe that SCV is currently better priced and will do very well long term if inflation and interest rates take off in a self-reinforcing wage-price cycle. I believe such a cycle is happening now to some extent but I do not expect it persist long term. I cold be wrong. I fully realize that I cannot accurately predict the future and if you invest long enough, I expect you'll realize it too. A 100% bet on a 3% slice of the market implies a lot more certainty than I have.

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

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 12:50 pm Well, first of all, there's not centuries of data. You only have three 30-year periods for US data. Not even two really for ex-US. And those 30-year periods have had vastly different characteristics. There simply isn't enough data to reasonably predict the next 30 years. You wouldn't have even heard of factors at the end of the previous 30 year block, which goes to show you how little data we have. Unless you think the last 30 years magically was the tipping point and we suddenly know everything there is to know and nothing that we know can change.
Well, we do have (a bit less accurate) data going back 200 years in the US, and even going back to Victorian age England.

As far as a changing future is concerned, same can be said for the market risk premium. Nobody invested in the total market until it really started taking off 20 years ago, which perhaps contributed to continually rising valuations in the US, who knows.
Last edited by investyoumust on Thu Jan 20, 2022 12:55 pm, edited 1 time in total.
Tom_T
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Re: Is it foolish to go all in Small Cap Value?

Post by Tom_T »

investyoumust wrote: Thu Jan 20, 2022 12:49 pm
Tom_T wrote: Thu Jan 20, 2022 12:40 pm I love threads like this. It will start with a question like 'should I do x?', then a bunch of people say "no, don't do x", and the OP says "but I really want to do x" and sometimes "you're wrong for telling me not to do x." So, go ahead! :)
I also love how different groups of people have a different perception of reality.

When I ask the question "should i go all in VTWAX" in the rational reminder community, i get "oh, no you have all your eggs in one basket", "you need to diversify across risk factors", "you are stupid for believing in the market risk premium but not the other risk premiums".

It's really a result of people choosing to self-select the communities they want to belong to, and each community has its own set of widely accepted "truths".
But why ask "is it foolish to do x" and then debate anyone who says yes, it is? You're not asking for advice - you just want people to agree with the decision you've already made.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Tom_T wrote: Thu Jan 20, 2022 12:55 pm But why ask "is it foolish to do x" and then debate anyone who disagrees? You're not asking for advice - you just want people to agree with the decision you've already made.
If I wanted for people to agree with me, I wouldn't post in one of the most die-hard passive communities on the internet. :wink:
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 12:49 pm
Tom_T wrote: Thu Jan 20, 2022 12:40 pm I love threads like this. It will start with a question like 'should I do x?', then a bunch of people say "no, don't do x", and the OP says "but I really want to do x" and sometimes "you're wrong for telling me not to do x." So, go ahead! :)
I also love how different groups of people have a different perception of reality.

When I ask the question "should i go all in VTWAX" in the rational reminder community, i get "oh, no you have all your eggs in one basket", "you need to diversify across risk factors", "you are stupid for believing in the market risk premium but not the other risk premiums".

It's really a result of people choosing to self-select the communities they want to belong to, and each community has its own set of widely accepted "truths".
VTWAX has over 9,000 stocks. VSIAX has 1,000 stocks. How is investing in the former, as opposed to the latter, tantamount to putting all of one's eggs in a single basket?
Last edited by mikejuss on Thu Jan 20, 2022 12:59 pm, edited 1 time in total.
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Tom_T
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Re: Is it foolish to go all in Small Cap Value?

Post by Tom_T »

investyoumust wrote: Thu Jan 20, 2022 12:56 pm
Tom_T wrote: Thu Jan 20, 2022 12:55 pm But why ask "is it foolish to do x" and then debate anyone who disagrees? You're not asking for advice - you just want people to agree with the decision you've already made.
If I wanted for people to agree with me, I wouldn't post in one of the most die-hard passive communities on the internet. :wink:
Then I don't understand the purpose of this thread. You are arguing with everyone who thinks that 100% SCV is not a good idea. And, by the way, that would be the position of the vast majority of experts, not just people on this Forum. So, go ahead. Maybe you will do great.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 12:59 pm
VTWAX has over 9,000 stocks. VSIAX has 1,000 stocks. How is investing in the former, as opposed to the latter, tantamount to putting all of one's eggs in a single basket?
That's because they focus on the "drivers of returns". By investing in all 9000 stocks, they view that as being "concentrated" in only one "factor", the "market risk factor". If you want more "diversification" than that you need to "diversify" to other "drivers of returns" like size and value.
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investyoumust
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Tom_T wrote: Thu Jan 20, 2022 12:59 pm Then I don't understand the purpose of this thread. You are arguing with everyone who thinks that 100% SCV is not a good idea. And, by the way, that would be the position of the vast majority of experts, not just people on this Forum. So, go ahead. Maybe you will do great.
Most experts believe there is more to sensible investing than market capitalization weighted index funds.
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

investyoumust wrote: Thu Jan 20, 2022 12:54 pm
burritoLover wrote: Thu Jan 20, 2022 12:50 pm Well, first of all, there's not centuries of data. You only have three 30-year periods for US data. Not even two really for ex-US. And those 30-year periods have had vastly different characteristics. There simply isn't enough data to reasonably predict the next 30 years. You wouldn't have even heard of factors at the end of the previous 30 year block, which goes to show you how little data we have. Unless you think the last 30 years magically was the tipping point and we suddenly know everything there is to know and nothing that we know can change.
Well, we do have (a bit less accurate) data going back 200 years in the US, and even going back to Victorian age England.

As far as a changing future is concerned, same can be said for the market risk premium. Nobody invested in the total market until it really started taking off 20 years ago, which perhaps contributed to continually rising valuations in the US, who knows.
Maybe you can ask Fama and French to include the "bit less accurate" data in their next factor paper so that includes an additional 110 years of data.

The behavior of MCW total market fund is virtually identical to the S&P 500 for all intents and purposes, which is now almost 60 years old. Not sure what you are trying to say about valuations.
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Re: Is it foolish to go all in Small Cap Value?

Post by willthrill81 »

U.S. SCV has had lower start date sensitivity, higher returns, and a significantly higher 30 year SWR than a portfolio with 60% TSM and 40% bonds.

No, I don't think it would be foolish at all to go 'all in' with SCV if you're committed to holding it permanently.
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Re: Is it foolish to go all in Small Cap Value?

Post by willthrill81 »

investyoumust wrote: Thu Jan 20, 2022 1:02 pm
mikejuss wrote: Thu Jan 20, 2022 12:59 pm
VTWAX has over 9,000 stocks. VSIAX has 1,000 stocks. How is investing in the former, as opposed to the latter, tantamount to putting all of one's eggs in a single basket?
That's because they focus on the "drivers of returns". By investing in all 9000 stocks, they view that as being "concentrated" in only one "factor", the "market risk factor". If you want more "diversification" than that you need to "diversify" to other "drivers of returns" like size and value.
Correct. Market beta is only a single driver of returns. Size and value are others. Adding exposure to these return drivers has both increased returns and reduced start date sensitivity.
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Re: Is it foolish to go all in Small Cap Value?

Post by Triple digit golfer »

mikejuss wrote: Thu Jan 20, 2022 12:59 pm
investyoumust wrote: Thu Jan 20, 2022 12:49 pm
Tom_T wrote: Thu Jan 20, 2022 12:40 pm I love threads like this. It will start with a question like 'should I do x?', then a bunch of people say "no, don't do x", and the OP says "but I really want to do x" and sometimes "you're wrong for telling me not to do x." So, go ahead! :)
I also love how different groups of people have a different perception of reality.

When I ask the question "should i go all in VTWAX" in the rational reminder community, i get "oh, no you have all your eggs in one basket", "you need to diversify across risk factors", "you are stupid for believing in the market risk premium but not the other risk premiums".

It's really a result of people choosing to self-select the communities they want to belong to, and each community has its own set of widely accepted "truths".
VTWAX has over 9,000 stocks. VSIAX has 1,000 stocks. How is investing in the former, as opposed to the latter, tantamount to putting all of one's eggs in a single basket?
I agree with your sentiment. VTWAX is the complete opposite of putting all eggs in one basket.

The poster is looking for confirmation bias, not a different perspective.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 1:04 pm Maybe you can ask Fama and French to include the "bit less accurate" data in their next factor paper so that includes an additional 110 years of data.

The behavior of MCW total market fund is virtually identical to the S&P 500 for all intents and purposes, which is now almost 60 years old. Not sure what you are trying to say about valuations.
There you go, 200 years of data: https://www.twocenturies.com/blog/2020/ ... d-momentum

Almost nobody invested in the total stock market 60 years ago. Now that everybody and their dog is saving for retirement in the S&P 500, and with valuations at historically elevated levels, nobody should expect the historical market risk premium either.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 1:02 pm
mikejuss wrote: Thu Jan 20, 2022 12:59 pm
VTWAX has over 9,000 stocks. VSIAX has 1,000 stocks. How is investing in the former, as opposed to the latter, tantamount to putting all of one's eggs in a single basket?
That's because they focus on the "drivers of returns". By investing in all 9000 stocks, they view that as being "concentrated" in only one "factor", the "market risk factor". If you want more "diversification" than that you need to "diversify" to other "drivers of returns" like size and value.
Fair enough--but aren't you yourself proposing to focus on a single driver?
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 1:11 pm
Fair enough--but aren't you yourself proposing to focus on a single driver?
No, I am proposing to spread the bets across all the Fama French factors as much as possible. (market, size, value, profitability)
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Re: Is it foolish to go all in Small Cap Value?

Post by willthrill81 »

investyoumust wrote: Thu Jan 20, 2022 1:12 pm
mikejuss wrote: Thu Jan 20, 2022 1:11 pm
Fair enough--but aren't you yourself proposing to focus on a single driver?
No, I am proposing to spread the bets across all the Fama French factors as much as possible. (market, size, value, profitability)
You would likely enjoy this recent thread on historically efficient portfolios. SCV has been one of the key assets involved in most of them.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 1:12 pm
mikejuss wrote: Thu Jan 20, 2022 1:11 pm
Fair enough--but aren't you yourself proposing to focus on a single driver?
No, I am proposing to spread the bets across all the Fama French factors as much as possible. (market, size, value, profitability)
Perhaps I misread your initial post. Aren't you all in on small-cap value? What other kinds of stocks are you considering investing in?
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 1:14 pm
Perhaps I misread your initial post. Aren't you all in on small-cap value? What other kinds of stocks are you considering investing in?
In addition to being exposed to small and value, small cap value is also fully exposed to market risk, in addition to profitability via the inclusion of earnings and cashflow screens.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

willthrill81 wrote: Thu Jan 20, 2022 1:13 pm
You would likely enjoy this recent thread on historically efficient portfolios. SCV has been one of the key assets involved in most of them.
Yeah, I really like the idea behind the stocks + long term bonds + gold combination.

But somehow I am not sold on giving up the high expected returns of stocks for those other assets, and I don't feel comfortable adding leverage.
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

investyoumust wrote: Thu Jan 20, 2022 1:07 pm
burritoLover wrote: Thu Jan 20, 2022 1:04 pm Maybe you can ask Fama and French to include the "bit less accurate" data in their next factor paper so that includes an additional 110 years of data.

The behavior of MCW total market fund is virtually identical to the S&P 500 for all intents and purposes, which is now almost 60 years old. Not sure what you are trying to say about valuations.
There you go, 200 years of data: https://www.twocenturies.com/blog/2020/ ... d-momentum

Almost nobody invested in the total stock market 60 years ago. Now that everybody and their dog is saving for retirement in the S&P 500, and with valuations at historically elevated levels, nobody should expect the historical market risk premium either.
https://www.pwlcapital.com/there-is-no- ... nd-bubble/

The problem is that you are so sure of yourself and think of factors as some proven theory. That is a recipe for failure. I have a 30% tilt in SCV - probably going to increase this to more like 40%. I understand and accept that the SCV premium may not exist going forward and that my SCV allocation may underperform the market. I understand and accept that the market premium may be smaller than it has historically. Heck, it is even possible that the equity premium ceases to exist over my investing period. I don't take anything for granted.
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Re: Is it foolish to go all in Small Cap Value?

Post by willthrill81 »

investyoumust wrote: Thu Jan 20, 2022 1:18 pm
willthrill81 wrote: Thu Jan 20, 2022 1:13 pm
You would likely enjoy this recent thread on historically efficient portfolios. SCV has been one of the key assets involved in most of them.
Yeah, I really like the idea behind the stocks + long term bonds + gold combination.

But somehow I am not sold on giving up the high expected returns of stocks for those other assets, and I don't feel comfortable adding leverage.
The historic benefits of LTT and gold were smaller for accumulators than retirees. I get your concern about leverage.
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Re: Is it foolish to go all in Small Cap Value?

Post by MotoTrojan »

I don't think so. You on the Rational Reminder forum? Many folks there 100% into small-value or similar funds (if you count something like AVES), or 100% factor funds (some momentum too).

I equal-weight QVAL, AVUV, IVAL, AVDV, and AVES. Not all SCV, but similar risk-profiles.
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Re: Is it foolish to go all in Small Cap Value?

Post by KyleAAA »

It isn't foolish, but most choose to hedge their bets. My allocation is 50% VTI and 50% AVUV. I also own bonds and real estate, so I'm not all in on stocks generally. As bets go, yours isn't a terrible one and I think you have a reasonable expectation that you'll outperform over the long term. But the odds that you underperform aren't negligible, either.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 1:21 pm https://www.pwlcapital.com/there-is-no- ... nd-bubble/

The problem is that you are so sure of yourself and think of factors as some proven theory. That is a recipe for failure. I have a 30% tilt in SCV - probably going to increase this to more like 40%. I understand and accept that the SCV premium may not exist going forward and that my SCV allocation may underperform the market. I understand and accept that the market premium may be smaller than it has historically. Heck, it is even possible that the equity premium ceases to exist over my investing period. I don't take anything for granted.
I don't have to be 100% sure of myself to invest in Small Cap Value. If Small Cap Value was just noise in past data, I will simply get the market risk premium in a noisy way through my small cap value fund. No big deal.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

MotoTrojan wrote: Thu Jan 20, 2022 1:22 pm I don't think so. You on the Rational Reminder forum? Many folks there 100% into small-value or similar funds (if you count something like AVES), or 100% factor funds (some momentum too).

I equal-weight QVAL, AVUV, IVAL, AVDV, and AVES. Not all SCV, but similar risk-profiles.
Yes, it's a great forum, I do check it out from time to time.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 1:16 pm
mikejuss wrote: Thu Jan 20, 2022 1:14 pm
Perhaps I misread your initial post. Aren't you all in on small-cap value? What other kinds of stocks are you considering investing in?
In addition to being exposed to small and value, small cap value is also fully exposed to market risk, in addition to profitability via the inclusion of earnings and cashflow screens.
If those are you favorite factors, go for 'em. But remember the old Bogleheads adage: nobody knows nothing.

Is what's prompting all of this discussion a belief that, say, large-cap growth is going to have weak returns in the future--or that you simply have a stronger stomach than most and thus are cut out to capture the risk premium?
Last edited by mikejuss on Thu Jan 20, 2022 1:31 pm, edited 1 time in total.
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

investyoumust wrote: Thu Jan 20, 2022 1:25 pm
burritoLover wrote: Thu Jan 20, 2022 1:21 pm https://www.pwlcapital.com/there-is-no- ... nd-bubble/

The problem is that you are so sure of yourself and think of factors as some proven theory. That is a recipe for failure. I have a 30% tilt in SCV - probably going to increase this to more like 40%. I understand and accept that the SCV premium may not exist going forward and that my SCV allocation may underperform the market. I understand and accept that the market premium may be smaller than it has historically. Heck, it is even possible that the equity premium ceases to exist over my investing period. I don't take anything for granted.
I don't have to be 100% sure of myself to invest in Small Cap Value. If Small Cap Value was just noise in past data, I will simply get the market risk premium in a noisy way through my small cap value fund. No big deal.
There you go again - you think because you did a factor regression over some past time period and the SCV fund showed something near 1.0 that you will always perfectly capture the market premium going forward even if SCV premium doesn't materialize.
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Re: Is it foolish to go all in Small Cap Value?

Post by willthrill81 »

KyleAAA wrote: Thu Jan 20, 2022 1:24 pm It isn't foolish, but most choose to hedge their bets. My allocation is 50% VTI and 50% AVUV. I also own bonds and real estate, so I'm not all in on stocks generally. As bets go, yours isn't a terrible one and I think you have a reasonable expectation that you'll outperform over the long term. But the odds that you underperform aren't negligible, either.
Historically, SCV has had much more upside potential than downside risk. Many have opined about U.S. SCV underperforming the S&P 500 over the last decade or so, but SCV (as measured by VISVX) still produced +10% real returns from 2010-2021, far more than anyone should have been planning for. And, more importantly, from 2000-2009, SCV returned 5% real, while TSM returned -2.7%.
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