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 »

mikejuss wrote: Thu Jan 20, 2022 9:55 am
The thing is, you have to know your risk tolerance beforehand, because if you pull back after 10 or 20 years you'll very likely cost yourself a lot of money. That's the problem with concentrated bets like these, and why, even if a broad market index fund does not have the absolute best returns among all index funds, it also doesn't put one's nerves to the test so much and thus is easier to hang onto for decades. That's why your plan is not a good one.
I think the main risk is tracking error regret. While the max drawdown is a bit higher for Small Cap Value than for the total market, nobody is going to sell their long-term investment when it is down 50%, and the couple extra percentages of drawdown don't make much of a difference for the level-headed long-term investor.
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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 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.
Last edited by Morse Code on Thu Jan 20, 2022 10:03 am, edited 1 time in total.
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Re: Is it foolish to go all in Small Cap Value?

Post by whereskyle »

investyoumust wrote: Thu Jan 20, 2022 7:00 am
Jack FFR1846 wrote: Thu Jan 20, 2022 6:58 am I did a quick yahoo chart with VTI and VBR over the last 5 years. VTI gained double what VBR gained.
Why would we expect that going forward? What is it about VBR that we believe will cause it to underperform forever?
What is it about small-cap value that we believe will cause it to outperform in the future?

That it did so in the past?
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Re: Is it foolish to go all in Small Cap Value?

Post by livesoft »

Well, the trick is not just avoiding selling when something is down 50%, but having the guts to buy lots more when something is down 50%. :)

And of course, one needs some money when things are down 50% in order to buy more of those things that are down 50%. :twisted:
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 9:56 am Only 2% of the world's stocks describe the entire gain of all the markets in the world. We don't know where that 2% is going to come from over the period of time you are investing until you need to start withdrawing from your portfolio. When you start withdrawing, you could very well be in negative territory compared to total market portfolio. SORR is not just an equity vs. bonds consideration.
I don't believe the dispersion of returns are going to be that big. DFA's micro cap fund, which everybody likes to point to for factor investing not working, matched the market over 40 years or so. No harm done.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

nisiprius wrote: Thu Jan 20, 2022 9:57 am No, that isn't what you're asking. Your thread title is "is it foolish to go all in Small Cap Value." That's a different question.

At this moment, I think it's possible that you don't actually acknowledge the difference.

You need to weight the outcome of any strategy by the probability of following that strategy.

What percentage of your net worth was in small-cap value stocks around the end of 2007?

If you follow your plan, what percentage will it be going forward?

That will help you judge whether you have adequate risk tolerance to hold 100% small-cap value "durably."
I didn't invest in 2007. How should I know if I can handle that emotionally? I believe I can...
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Re: Is it foolish to go all in Small Cap Value?

Post by nisiprius »

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.
How? Do you think you can avoid behavioral mistakes by deciding not to make behavioral mistakes?

If not, how do you avoid them?

In research experiments people made specific behavioral mistakes--anchoring is the one I remember--even after it was explained to them and they were cautioned not to make it. The number spun on a wheel of fortune influenced their numerical estimates of unrelated things, even though they were warned of the effect, and even though their rational mind understood perfectly that the number on the wheel had no relation to anything they were being asked to decide on.
Last edited by nisiprius on Thu Jan 20, 2022 10:21 am, edited 1 time in total.
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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 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.
Last edited by mikejuss on Thu Jan 20, 2022 10:11 am, edited 1 time in total.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

UpperNwGuy wrote: Thu Jan 20, 2022 9:58 am
Wait! You have 40 years until retirement? That means you are in your early 20s and don't have much experience in investing. Your own statements about your high risk tolerance are not founded in actual investing experience but in wishful thinking.

This whole thread now seems sad when I see such a young investor joining the forum today, asking for comments on his proposed controversial investing strategy a few hours after joining, receiving excellent advice from very experienced investors, and then rejecting all that advice.
The MSCI World dropped 57% during the GFC. The MSCI World Small Cap Value Weighted dropped 62%. Are those 5% really that important? Selling low is bad in either case.
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Re: Is it foolish to go all in Small Cap Value?

Post by onourway »

investyoumust wrote: Thu Jan 20, 2022 10:07 am
nisiprius wrote: Thu Jan 20, 2022 9:57 am No, that isn't what you're asking. Your thread title is "is it foolish to go all in Small Cap Value." That's a different question.

At this moment, I think it's possible that you don't actually acknowledge the difference.

You need to weight the outcome of any strategy by the probability of following that strategy.

What percentage of your net worth was in small-cap value stocks around the end of 2007?

If you follow your plan, what percentage will it be going forward?

That will help you judge whether you have adequate risk tolerance to hold 100% small-cap value "durably."
I didn't invest in 2007. How should I know if I can handle that emotionally? I believe I can...
To me this is the crux of the issue. You have no idea that you can actually do this because you've never invested in a sustained negative market. Tilting towards anything 100% means that you are in for 40 years of additional stress vs. holding a total market portfolio for, at best, a theoretical, relatively small, outperformance. It's just not worth it.
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Re: Is it foolish to go all in Small Cap Value?

Post by UpperNwGuy »

investyoumust wrote: Thu Jan 20, 2022 10:07 am
nisiprius wrote: Thu Jan 20, 2022 9:57 am No, that isn't what you're asking. Your thread title is "is it foolish to go all in Small Cap Value." That's a different question.

At this moment, I think it's possible that you don't actually acknowledge the difference.

You need to weight the outcome of any strategy by the probability of following that strategy.

What percentage of your net worth was in small-cap value stocks around the end of 2007?

If you follow your plan, what percentage will it be going forward?

That will help you judge whether you have adequate risk tolerance to hold 100% small-cap value "durably."
I didn't invest in 2007. How should I know if I can handle that emotionally? I believe I can...
When a person is first starting to invest, they often don't mind watching their portfolio decline in a downturn — because the amount of money being lost is usually quite small. Twenty years later, however, when the portfolio has grown, attitudes towards losses change.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

onourway wrote: Thu Jan 20, 2022 10:11 am
investyoumust wrote: Thu Jan 20, 2022 10:07 am
nisiprius wrote: Thu Jan 20, 2022 9:57 am No, that isn't what you're asking. Your thread title is "is it foolish to go all in Small Cap Value." That's a different question.

At this moment, I think it's possible that you don't actually acknowledge the difference.

You need to weight the outcome of any strategy by the probability of following that strategy.

What percentage of your net worth was in small-cap value stocks around the end of 2007?

If you follow your plan, what percentage will it be going forward?

That will help you judge whether you have adequate risk tolerance to hold 100% small-cap value "durably."
I didn't invest in 2007. How should I know if I can handle that emotionally? I believe I can...
To me this is the crux of the issue. You have no idea that you can actually do this because you've never invested in a sustained negative market. Tilting towards anything 100% means that you are in for 40 years of additional stress vs. holding a total market portfolio for, at best, a theoretical, relatively small, outperformance. It's just not worth it.
OP, serious question: why don't you get into stock-picking? The upside, as you know, is tremendous. What's holding you back?
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 10:12 am
OP, serious question: why don't you get into stock-picking? The upside, as you know, is tremendous. What's holding you back?
Massive time sink. Not interested. Skewness in stock returns. Unlikely to work.
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

investyoumust wrote: Thu Jan 20, 2022 10:05 am
burritoLover wrote: Thu Jan 20, 2022 9:56 am Only 2% of the world's stocks describe the entire gain of all the markets in the world. We don't know where that 2% is going to come from over the period of time you are investing until you need to start withdrawing from your portfolio. When you start withdrawing, you could very well be in negative territory compared to total market portfolio. SORR is not just an equity vs. bonds consideration.
I don't believe the dispersion of returns are going to be that big. DFA's micro cap fund, which everybody likes to point to for factor investing not working, matched the market over 40 years or so. No harm done.
There's some 90 years of US stock data and roughly 50 years for ex-US. It is insanity to think that you can take that small set of data, which has been found to have dramatic shifts even over 20 year periods, and determine with any certainty what things will look like exactly 40 years from now when you start withdrawing from your portfolio.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 10:17 am
mikejuss wrote: Thu Jan 20, 2022 10:12 am
OP, serious question: why don't you get into stock-picking? The upside, as you know, is tremendous. What's holding you back?
Massive time sink. Not interested. Skewness in stock returns. Unlikely to work.
What do you mean by "skewness in stock returns"?
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Re: Is it foolish to go all in Small Cap Value?

Post by Dave55 »

UpperNwGuy wrote: Thu Jan 20, 2022 9:58 am
investyoumust wrote: Thu Jan 20, 2022 9:45 am
mikejuss wrote: Thu Jan 20, 2022 9:44 am
How many years out from retirement are you, OP? How many cycles of alpha do you believe that small-cap value will go through before you retire? Of course, the longer the better.
40 years perhaps.
Wait! You have 40 years until retirement? That means you are in your early 20s and don't have much experience in investing. Your own statements about your high risk tolerance are not founded in actual investing experience but in wishful thinking.

This whole thread now seems sad when I see such a young investor joining the forum today, asking for comments on his proposed controversial investing strategy a few hours after joining, receiving excellent advice from very experienced investors, and then rejecting all that advice.
You can't confer a benefit on an unwilling recipient. Or should I say "we can't".

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

Post by investyoumust »

burritoLover wrote: Thu Jan 20, 2022 10:18 am There's some 90 years of US stock data and roughly 50 years for ex-US. It is insanity to think that you can take that small set of data, which has been found to have dramatic shifts even over 20 year periods, and determine with any certainty what things will look like exactly 40 years from now when you start withdrawing from your portfolio.
Maybe. But even if these factors are not real, taking a "random", but very diversified, subset of stocks likely won't do much harm, compared to the general market.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 10:19 am
What do you mean by "skewness in stock returns"?
Didn't Bessembinder find that 4% of US stocks account for all the wealth creation in the US stock market?

Finding a handful of winning stocks is like finding a needle in a haystack, which is why we diversify.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 10:24 am
mikejuss wrote: Thu Jan 20, 2022 10:19 am
What do you mean by "skewness in stock returns"?
Didn't Bessembinder find that 4% of US stocks account for all the wealth creation in the US stock market?

Finding a handful of winning stocks is like finding a needle in a haystack, which is why we diversify.
Yet you do feel confident that you can pick what we might call a flavor of diversified stocks that will perform better over the next 40 years?
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Re: Is it foolish to go all in Small Cap Value?

Post by mrpotatoheadsays »

investyoumust wrote: Thu Jan 20, 2022 5:36 am Is it foolish to go all in Small Cap Value?
It's just as foolish as going all in large-cap blend (e.g S&P 500 or US Total Market). You should expect downturns over 50%; you should expect a decade or more of near zero returns; you should expect to hold your position long-term (i.e 25 to 30 years) to get the historical average returns. I would, however, recommend you diversify than go 100% in any asset class, e.g.

25% US small-cap blend + 25% US small-cap value + 25% International small-cap blend + 25% International small-cap value
or
25% US large-cap blend + 25% US large-cap value + 25% US small-cap blend + 25% US small-cap value
or
50% US large-cap value + 50% US small-cap value
...

and be sure you choose truly small and truly deep-value value funds.


Analyze the following long-term performance metrics and investment returns (1930-2019):

LCV: large-cap value; SCB: small-cap blend; SCV: small-cap value; US 4-Fund Combo (25/25/25/25): S&P 500 (i.e large-cap blend), large-cap value, small-cap blend, small-cap value
Image
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 10:29 am Yet you do feel confident that you can pick what we might call a flavor of diversified stocks that will perform better over the next 40 years?
Yes, because some of the brightest economists agree. (and it makes intuitive sense to me)
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Re: Is it foolish to go all in Small Cap Value?

Post by JSPECO9 »

I don't think it's any more foolish to go all in on SCV than it is to go all in the TSM. I prefer to be diversified but if you want to take on more risk for more potential reward than TSM, I think SCV is a very sensible way to do so.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mrpotatoheadsays wrote: Thu Jan 20, 2022 10:29 am
It's just as foolish as going all in large-cap blend (e.g S&P 500 or US Total Market). You should expect downturns over 50%; you should expect a decade or more of near zero returns; you should expect to hold your position long-term (i.e 25 to 30 years) to get the historical average returns. I would, however, recommend you diversify than go 100% in any asset class, e.g.

25% US small-cap blend + 25% US small-cap value + 25% International small-cap blend + 25% International small-cap value
or
25% US large-cap blend + 25% US large-cap value + 25% US small-cap blend + 25% US small-cap value
or
50% US large-cap value + 50% US small-cap value
...

and be sure you choose truly small and truly deep-value value funds.


Analyze the following long-term performance metrics and investment returns (1930-2019):

LCV: large-cap value; SCB: small-cap blend; SCV: small-cap value; US 4-Fund Combo (25/25/25/25): S&P 500 (i.e large-cap blend), large-cap value, small-cap blend, small-cap value
Image
I don't get the logic behind this.

Why would I want to dilute my value exposure with small cap blend or dilute my size exposure with large cap value?
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

JSPECO9 wrote: Thu Jan 20, 2022 10:32 am I don't think it's any more foolish to go all in on SCV than it is to go all in the TSM. I prefer to be diversified but if you want to take on more risk for more potential reward than TSM, I think SCV is a very sensible way to do so.
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Re: Is it foolish to go all in Small Cap Value?

Post by nisiprius »

Holy cow. Six postings, one scooping me, in the time it took me to search for and find the link to the Bessembinder study. Oh, well.
mikejuss wrote: Thu Jan 20, 2022 10:19 am
investyoumust wrote: Thu Jan 20, 2022 10:17 am
mikejuss wrote: Thu Jan 20, 2022 10:12 am
OP, serious question: why don't you get into stock-picking? The upside, as you know, is tremendous. What's holding you back?
Massive time sink. Not interested. Skewness in stock returns. Unlikely to work.
What do you mean by "skewness in stock returns"?
An astonishing percentage of market returns come from an astonishingly tiny percentage of the stocks.

I think that's an objective fact--it can be fleshed out numerically but I'm too lazy to look up the numbers, IIRC one much-discussed study...

Oh, OK... Do Global Stocks Outperform US Treasury Bills?
We study compound returns to nearly 62,000 global common stocks during the 1990 to 2018 period, documenting that the majority, 56% of US stocks and 61% of non-US stocks, under perform one-month US Treasury bills over the full sample. Focusing on aggregate shareholder wealth creation measured in US dollars, we find that the top-performing 1.3% of firms account for the $US 44.7 trillion in global stock market wealth creation from 1990 to 2018. Outside the US, less than one percent of firms account for the $US 16.0 trillion in net wealth creation. These results highlight the practical implications of the fact that the distribution of long-run stock returns is strongly positively skewed.
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Re: Is it foolish to go all in Small Cap Value?

Post by burritoLover »

investyoumust wrote: Thu Jan 20, 2022 10:22 am
burritoLover wrote: Thu Jan 20, 2022 10:18 am There's some 90 years of US stock data and roughly 50 years for ex-US. It is insanity to think that you can take that small set of data, which has been found to have dramatic shifts even over 20 year periods, and determine with any certainty what things will look like exactly 40 years from now when you start withdrawing from your portfolio.
Maybe. But even if these factors are not real, taking a "random", but very diversified, subset of stocks likely won't do much harm, compared to the general market.
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.
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Re: Is it foolish to go all in Small Cap Value?

Post by mrpotatoheadsays »

investyoumust wrote: Thu Jan 20, 2022 10:34 am Why would I want to dilute my value exposure with small cap blend or dilute my size exposure with large cap value?
Mitigation of sequence of return risk.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

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

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 10:31 am
mikejuss wrote: Thu Jan 20, 2022 10:29 am Yet you do feel confident that you can pick what we might call a flavor of diversified stocks that will perform better over the next 40 years?
Yes, because some of the brightest economists agree. (and it makes intuitive sense to me)
Then your main challenge over the next 4 decades--though you may not realize this yet because you're 20--is going to be behavioral. The math may be on your side, though your emotions may not be. Good luck!
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Re: Is it foolish to go all in Small Cap Value?

Post by Morse Code »

nisiprius wrote: Thu Jan 20, 2022 10:08 am How? Do you think you can avoid behavioral mistakes by deciding not to make behavioral mistakes?
Yup. It really is that simple. It starts with not comparing your returns to some arbitrary benchmark.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mrpotatoheadsays wrote: Thu Jan 20, 2022 10:46 am
Mitigation of sequence of return risk.
I believe I can mitigate sequence of return risk best if I diversify as far away from market beta and get as much of the other drivers of returns, like size, value and profitability.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 10:51 am
Then your main challenge over the next 4 decades--though you may not realize this yet because you're 20--is going to be behavioral. The math may be on your side, though your emotions may not be. Good luck!
I appreciate the behavioral sympathies, but I don't think the path for the total stock market investor is going to be much smoother, since it also can underperform T-bills for decades.
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Re: Is it foolish to go all in Small Cap Value?

Post by muffins14 »

I personally would not go 100%SCV. It’s likely that in some timescales, large cap growth does great.

Why completely avoid large cap growth stocks rather than have an asset allocation with both? I don’t want to get unlucky an invest in a timeframe when SCV does terribly, like over my retirements first 10 years. Why not hold a tilted portfolio so you are not so exposed to SCV risk?
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

muffins14 wrote: Thu Jan 20, 2022 10:56 am Why not hold a tilted portfolio so you are not so exposed to SCV risk?
That's the point. If you want to earn the risk premium, you have to take the risk.
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Re: Is it foolish to go all in Small Cap Value?

Post by brawlrats »

investyoumust wrote: Thu Jan 20, 2022 10:07 am
nisiprius wrote: Thu Jan 20, 2022 9:57 am No, that isn't what you're asking. Your thread title is "is it foolish to go all in Small Cap Value." That's a different question.

At this moment, I think it's possible that you don't actually acknowledge the difference.

You need to weight the outcome of any strategy by the probability of following that strategy.

What percentage of your net worth was in small-cap value stocks around the end of 2007?

If you follow your plan, what percentage will it be going forward?

That will help you judge whether you have adequate risk tolerance to hold 100% small-cap value "durably."
I didn't invest in 2007. How should I know if I can handle that emotionally? I believe I can...
I was a young investor in 2007...just a few years of 401k contributions and a small taxable account. The losses weren't huge for me and the upside was tremendous. But I knew a lot of people near retirement who were crushed.

Fast forward to March 2020...my wife and I lost about $700K in two weeks. Thankfully, we're still quite far from retirement so it didn't impact us terribly, but we had to stick with our plan and stay the course, which we did and were better off for it. But I've seen countless stories of people who didn't, sold at the bottom and missed much of the rebound.

Its painful watching that significant amount of money disappear in days. Do you have the stomach to do that? Its not necessarily a fair question until you've been in the situation and experienced it, but you do need to seriously ponder it. If SCV stocks get crushed and you panic and sell, you've destroyed your entire plan and any benefits you might have gained to that point.
Last edited by brawlrats on Thu Jan 20, 2022 11:05 am, 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 »

brawlrats wrote: Thu Jan 20, 2022 11:02 am I was a young investor in 2007...just a few years of 401k contributions and a small taxable account. The losses weren't huge for me and the upside was tremendous. But I knew a lot of people near retirement who were crushed.

Fast forward to March 2020...my wife and I lost about $700K in two weeks. Thankfully, we're still quite far from retirement so it didn't impact us terribly, but we had to force ourselves to stay the course, which we did and were better off for it. But I've seen countless stories of people who didn't, sold at the bottom and missed much of the rebound. Its painful watching that significant amount of money disappear in days. Do you have the stomach to do that? Its not necessarily a fair question until you've been in the situation and experienced it, but you do need to seriously ponder it.
When things get tough, I can always take comfort in the wisdom of Warren Buffett, that owners of businesses will be rewarded handsomely over time.
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Re: Is it foolish to go all in Small Cap Value?

Post by Marseille07 »

investyoumust wrote: Thu Jan 20, 2022 10:54 am I believe I can mitigate sequence of return risk best if I diversify as far away from market beta and get as much of the other drivers of returns, like size, value and profitability.
I'm afraid you can't: https://www.portfoliovisualizer.com/bac ... tion2_2=50

Stocks go down across the board. You'd need bonds or a withdrawal strategy more resilient against SORR.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

Marseille07 wrote: Thu Jan 20, 2022 11:06 am
I'm afraid you can't: https://www.portfoliovisualizer.com/bac ... tion2_2=50

Stocks go down across the board. You'd need bonds or a withdrawal strategy more resilient against SORR.
That's short-term correlation.

But longer-term, Small Cap Value has been more reliable over 5-10-20 year periods.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 10:56 am
mikejuss wrote: Thu Jan 20, 2022 10:51 am
Then your main challenge over the next 4 decades--though you may not realize this yet because you're 20--is going to be behavioral. The math may be on your side, though your emotions may not be. Good luck!
I appreciate the behavioral sympathies, but I don't think the path for the total stock market investor is going to be much smoother, since it also can underperform T-bills for decades.
We could argue about the bolded part ad nauseam, but it probably isn't worth our time.

On a side note, is it your plan to remain invested entirely in equities forever? Or will you add bonds over time?
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Re: Is it foolish to go all in Small Cap Value?

Post by Marseille07 »

investyoumust wrote: Thu Jan 20, 2022 11:07 am That's short-term correlation.

But longer-term, Small Cap Value has been more reliable over 5-10-20 year periods.
That has nothing to do with SORR which you said SCV would mitigate. I'm not sure if you understand what SORR is.
Last edited by Marseille07 on Thu Jan 20, 2022 11:33 am, edited 2 times in total.
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Re: Is it foolish to go all in Small Cap Value?

Post by muffins14 »

investyoumust wrote: Thu Jan 20, 2022 11:01 am
muffins14 wrote: Thu Jan 20, 2022 10:56 am Why not hold a tilted portfolio so you are not so exposed to SCV risk?
That's the point. If you want to earn the risk premium, you have to take the risk.
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
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 11:07 am
We could argue about the bolded part ad nauseam, but it probably isn't worth our time.

On a side note, is it your plan to remain invested entirely in equities forever? Or will you add bonds over time?
If I can make it so my spending is a bit dynamic, I would like to keep an equity-focused portfolio.
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

muffins14 wrote: Thu Jan 20, 2022 11:09 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.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 11:15 am
mikejuss wrote: Thu Jan 20, 2022 11:07 am
We could argue about the bolded part ad nauseam, but it probably isn't worth our time.

On a side note, is it your plan to remain invested entirely in equities forever? Or will you add bonds over time?
If I can make it so my spending is a bit dynamic, I would like to keep an equity-focused portfolio.
I'm not sure what you mean by "dynamic" and "equities-focused."
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

mikejuss wrote: Thu Jan 20, 2022 11:18 am
I'm not sure what you mean by "dynamic" and "equities-focused."
dynamic = Spend a bit less when stocks are down.

Equity-focused = less bonds.
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Re: Is it foolish to go all in Small Cap Value?

Post by muffins14 »

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.
Correct

It is not clear however that the opportunity cost of being 50/50 total market / SCV is just too high to bear.

If anything, recent history has shown there is significant opportunity cost to being 100% SCV.

“You can’t eat expected returns” etc etc

I’m not saying don’t invest in SCV. I’m just saying that something less than 100% might be a very reasonable choice. You’ve clearly already made up your mind though
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

muffins14 wrote: Thu Jan 20, 2022 11:21 am
Correct

It is not clear however that the opportunity cost of being 50/50 total market / SCV is just too high to bear.

I’d anything, recent history has shown there is significant opportunity cost to being 100% SCV.

“You can eat expected returns” etc etc

I’m not saying don’t invest in SCV. I’m just saying that something less than 100% might be a very reasonable choice. You’ve clearly already made up your mind though
Recent history has shown that SCV has pretty decent returns. It's the (US) market that has produced unsustainably good returns over the last decade.
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Re: Is it foolish to go all in Small Cap Value?

Post by mikejuss »

investyoumust wrote: Thu Jan 20, 2022 11:20 am
mikejuss wrote: Thu Jan 20, 2022 11:18 am
I'm not sure what you mean by "dynamic" and "equities-focused."
dynamic = Spend a bit less when stocks are down.

Equity-focused = less bonds.
So you'll buy some bonds along the way, I take it.

Regarding your small-cap tilt and your spending, you seem to have sketched out, in a great deal of detail, what the next 40 years of your life are going to look like. I think this is the thing that most posters here are trying to tell you is foolhardy.
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Re: Is it foolish to go all in Small Cap Value?

Post by muffins14 »

investyoumust wrote: Thu Jan 20, 2022 11:22 am
muffins14 wrote: Thu Jan 20, 2022 11:21 am
Correct

It is not clear however that the opportunity cost of being 50/50 total market / SCV is just too high to bear.

I’d anything, recent history has shown there is significant opportunity cost to being 100% SCV.

“You can eat expected returns” etc etc

I’m not saying don’t invest in SCV. I’m just saying that something less than 100% might be a very reasonable choice. You’ve clearly already made up your mind though
Recent history has shown that SCV has pretty decent returns. It's the (US) market that has produced unsustainably good returns over the last decade.
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
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Re: Is it foolish to go all in Small Cap Value?

Post by investyoumust »

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.
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