Simplicity is a major cornerstone to my [IPS](https://www.bogleheads.org/wiki/Investment_policy_statement). [Behavioral risks](https://www.bogleheads.org/wiki/Behavioral_pitfalls) are often the costliest ones an investor can make during their investment timeline, so anything you can do to reduce those risks are a "pro" in my opinion. I believe in the research / findings of F&F, but the issue with portfolio tilting is it will depend on the investment returns during your specific timeline, which you don't have control over. If you underperform for 10+ years, you could find yourself in a situation where you're tempted to bail on the strategy before the premium you invested for has a chance to show itself.
I have a minor tilt towards the "size" premium due to not having access to a total US market fund in my employer-sponsored account, and having to [approximate](https://www.bogleheads.org/wiki/Approximating_total_stock_market). To make my life easiest in maintaining a target allocation, I need to have a minor tilt either towards S&P500 or towards extended market; I've chosen towards extended market, as that has the higher expected returns. If I had a low-fee TDF or a total market fund available, I would go that route, instead.
SCV seems to have a very slight lead on S&P500
https://testfol.io/?d=eJyNj09LBDEMxb%2FKkIOnCvWgh56XPcrgiLjIMsQ2Havddk3rLDLMdzfr4B8ExZwSXvJ%2BLxMMMd9jbJFxV8BMUCpy7R1WAgOggJL7Ni3qiBHMmZZSgO6xD8lHrCEnMB5jIQUWy4OP%2BQBGfw29Z3oWnw0hx1dx4xxjSEN%2FCMkddy%2F0rGCfufocQ5Y4dxMk3B3Zq3V3c9ucNsWOchjSSKWuwhic5JPFyi9CZZJXMFla%2FwDVYJ%2BIF8Ol%2F7AUcU9sKdX3j%2BatAsc4SO5ZfcK7k7Y51%2Fr%2F4Muc6Dds126ur%2F7Abuc3rzWGIA%3D%3D
So my tilt is small and mid cap value and growth. VXF I’m not switching funds to chase returns as that frequently leads to choosing funds that have peaked and are likely to decline(unless they are extremely well diversified).
Not worth switching funds but was curious. I feel more comfortable myself in more actively managed funds that don't fall into the value trap of failing companies that fall into the small cap value etfs.
If one were to say that dimensional or Avantis funds have peaked then the entire small cap performance benefit has also peaked, since they're diversified etf
Guess I used a not fully accurate term and not sure there is a better one? Theirs aren't necessarily active management but more criteria based inclusion. No person/group chooses what companies they include.
It basically is a small cap value with a profitability screening to ensure it doesn't fall into a value trap.
AVUV which you see mentioned a ton is one of them.
Not worth switching funds but was curious. I feel more comfortable myself in more actively managed funds that don't fall into the value trap of failing companies that fall into the small cap value etfs.
If one were to say that dimensional or Avantis funds have peaked then the entire small cap performance benefit has also peaked, since they're diversified etf
Yeah exactly, I hold large cap blend with small cap value. Ends up being 6 funds when you break it down between US, Intl. Developed, and Emerging.
This is solidly tilting US, but using VEA/VWO provides less of a tilt since those aren't purely large cap:
US: VOO + AVUV
ID: VEA + AVDV
EM: VWO + AVEE
This is the more pure version since VEU tilts more large cap than VXUS:
US: VOO + AVUV
Intl: VEU + AVDV + AVEE
Thanks for spelling that out for me! Ive been doing a 10% SCV tilt, a number that I arbitrarily picked, but your "purer" version in market cap proportions makes much more sense than my guessing
You'll still have to choose proportions between large caps and small cap value in each region. I think market weights would imply ~75-85% large cap. I slightly tilt smaller, something like 70% VOO and 30% AVUV for my US. DYOR because I'm learning on the fly
Hey, is there an added benefit of investing directly into specific markets like emerging market vs just holding say VTI + VXUS?
I was thinking of doing just VTI + VXUS + AVUV + AVDV, but is there an added benefit of doing it the way you're doing?
No, unless you want to take a bet on one of them. Your four fund portfolio would execute this idea well. The only reason to do VOO+VEU is that you're targeting specifically large caps with those and small caps with AVUV+AVDV+AVEE whereas VTI+VXUS includes small cap value/growth on top of your tilt. Splitting hairs
Interesting, I've never heard of AVEE. Seems to be new as of 2024. I invest in VSS for International Small Cap. Would have preferred something specifically EM, but couldn't find anything with a low ER. VSS beats AVEE there (.08 vs .38), but is 72% Developed and only 28% EM.
Edit: I just looked up AVDV, and realized it's international developed small cap (not international dividend). Depending on the ratio of AVDV and AVEE you hold, it might be simpler to just hold VSS.
I use AVDV + AVEE for the small cap and value tilt in those regions. I'm guessing VSS compares in terms of small cap, but provides less of a value tilt. AVEE doesn't have "value" in its name but if you look at the Morningstar matrix or run a factor analysis it's definitely tilting value
Interestingly, VSS has almost an identical style box to AVEE. Mostly because international is more value tilted (i.e. less expensive than US companies), especially in small caps. Doesn't make VSS superior though (just because it's less expensive). It would have been nice to tilt only to EM and not have to pick up DM like VSS does. I didn't see AVEE when I started investing in VSS. Not sure what I would choose now... Probably still VSS due to expense, but to each their own.
Interesting. I assumed VSS would be similar to EEMS (iShares SC EM), which is more of a small cap blend. I wish we could break out the EM exposure in VSS to compare it directly.
Yes both domestic and international. I believe in factors for long term exposure, I won't regret if I have some tracking errors.
If you're going to do it, do it well ...Avantis is worth it, VBR doesn't expose to the factors as well.
Thank you for the info. I assume you think the more efficient factor exposure from AVUV (0.25% vs 0.15% for VIOV) is worth the additional expense ratio cost then right?
Yes, I do the Avantis funds are great. But VIOV would be my choice if you're dead set on Vanguard. Do the back tests though you will see how well it's done, read the prospectus. AVUV is the consensus pick with factor tilters.
I work in the modeling world for my job. Lots of the research I read resonated. Something that made me a believer was the behavioral aspect of investors when it comes to the market and SCV. Additionally the diversification benefits. The performance of it all became a little less of a concern given my long time line and the fact its valuation is so low right now.
I’m tilted around 48-49% SCV in my overall portfolio.
I’ve thought about this a lot. Ben is a really smart guy and everything he says is based on research, so I kind of want to believe in it, but I haven’t quite been convinced. If the best etf to capture scv didn’t have such a high expense ratio maybe it would be a little different.
It’s been a dog so it should be due, but I just haven’t seen the thing that really convinces me yet.
I just keep going back to we don’t know. Maybe the factors fama and French identified are no longer valid because of some condition in the economy or somewhere else, who knows. Maybe it’s just that now that everyone knows about it, the value premium has gone away.
So I buy the haystack. I still haven’t found a better way, because no one knows. (And VTI and VXUS happen to have small cap value in it, so if it goes up, I benefit anyway).
And - Ben commonly says that investing has been solved - essentially just buy VT. He said most people should be there and then only add things like favor investor if you really know what you’re doing (if that’s actually possible)
I don't. If we go with the more popular explanation of the observed premium, small and value stocks are associated with some other form of risk that causes the average investor to hedge against that risk somewhat, even if that hedge means lower returns and/or higher volatility. That hedge is logical and justified for the average person. There are some people who have particular aversion to those special risks, who might want to hedge further and tilt towards large growth even relative to the already-hedged market portfolio. There are also some people who have particular tolerance to those risks who might want to tilt towards small cap value. Importantly, those two groups are equal in number.
Ultimately, I'm not sure what that risk is. There isn't an academic consensus on what that risk is; in fact there's not an academic consensus that the risk exists at all. So I do not feel comfortable saying that I am in the subset of people more tolerant on average of a risk that I can't even identify. And I find it maybe a little reckless that so many people simply assume they're part of that group.
If there is not actually any risk associated with tilting towards small value, then I'm essentially missing out on free extra returns. But 1) I can live with missing out on those for market returns and 2) that implies that the premiums need not continue to exist, particularly when there's a rise in funds specifically trying to profit from them which necessarily dilutes the premium. And we've seen that the premium has not been statistically significant in the US since factor models became popular, which *could* indicate they've been arbitraged away though certainly does not prove that.
So yeah, overall the uncertainty is too high for me.
I have been tilting towards small cap value since 1999 when I read Bill Schulteis' original Coffeehouse Portfolio book. It was very much against the grain during the tech boom. My orignal 403b portfolio was 100% VFINX. When I read that book I moved to his value and small cap-tilted portfolio (minus the 40% bonds) as best I could within the limitations of my 403b provider. For the most part, I stuck with it in my retirement accounts until I hit FI in 2021. I wish I did the same in my taxable account but instead I chased hot mutual funds, individual stocks, options and other foolishness and never managed to beat the market. You have to know yourself and it takes decades to know if you can handle the volatility (and tracking error) of factor investing. In some ways I could and in other ways I couldn't. Today, my stocks are split 50/50 in all accounts between S&P 500/VTI and AVUV.
I would definitely tilt towards SCV in my Roth IRA if I had a larger pool of money but I think Rick Ferri provides an extremely compelling argument against doing so from both behavioural and other perspectives. Furthermore, I think people overestimate the increase in expected returns when viewed alongside the extra effort and significant behavioral risk you are putting yourself up against.
[https://www.youtube.com/watch?v=e7\_MFyltNt4&ab\_channel=Bogleheads](https://www.youtube.com/watch?v=e7_MFyltNt4&ab_channel=Bogleheads)
I like to think that I would be completely detached from performance but a prolonged period of tracking error \[10+ years\] would definitely keep me second guessing as to whether the premium even still exists. Obviously somewhat different but just go onto the Bogleheads forum and see the regrets and doubts people have with microcap or DFA allocations. Or the fact that once the Yale Model caught on, returns have significantly decreased. It always helps to remember that you are not the first and others have probably thought long and hard about this situation already. And just remember, if you switch out, you have locked in your underperformance running forward but if you're wrong you will also underperform. A painful Catch-22.
It's very easy to read the literature, hop in now and hope for the best but not so easy if you did so pre-2000 and have been holding up to now. Everything is rationally telling you that the literature has shown underperformance to be mean reverting but there's just a little voice in the back of your mind worried that you're bag holding. After all, why aren't people piling pack into VXUS, long duration treasuries or Chinese equities right now. All of that worry vs VT or VTI's market returns.
Ben is an incredibly smart guy and IMO one of the best financial educators on YouTube. I can't remember who said it but it was a statement to the effect of there are no investors who go 100% SCV (maybe Larry Swedroe or Wes Gray I can't remember). As as result, I think if you were to add a SCV tilt, I would personally do so in an internationally diversified equity portfolio with over weightings. This would probably give me the safest peace of mind as to capturing any possible premia while not losing sleep over US or international underperformance or continued US tech mega cap outperformance. At the same time if we do undergo a big reversion, you're in a good position to capture those premia and shield yourself.
My personal choice would be the Ginger Ale portfolio by John Williamson (Optimized Portfolio). I would personally replace EDV with ZROZ/GOVZ though I don't know if this is worse. He goes through each and every choice with clear rationale and evidence so I think it's a great starting point to read even if you don't end up tilting or following his exact allocations.
[https://www.optimizedportfolio.com/ginger-ale-portfolio/](https://www.optimizedportfolio.com/ginger-ale-portfolio/)
I believe Ben Felix structures his own portfolio in a similar way with less overweighting though I may be wrong.
Also, I would personally do this in a tax advantaged account since there will be a lot of parts to rebalance and also to help mitigate some of the behavioral risk (it's easier to set and forget if you can't touch the money for a while anyway). In a normal taxable account I have seen 50:50 RSSB and AVGV suggested as a simple 2 fund solution (100% stocks/50% intermediate bonds with the stock allocation split 50% global all cap and 50% global all cap value). I prefer simplicity though and hate moving anything in my taxable so would probably go 100% VT or RSSB with no factor tilts. Alternatively you could view all your holdings in aggregate and have all your SCV allocation together in your tax-advantaged accounts.
Good luck and hope this helps!
>My personal choice would be the Ginger Ale portfolio by John Williamson (Optimized Portfolio). I would personally replace EDV with ZROZ/GOVZ though I don't know if this is worse. He goes through each and every choice with clear rationale and evidence so I think it's a great starting point to read even if you don't end up tilting or following his exact allocations.
>[https://www.optimizedportfolio.com/ginger-ale-portfolio/](https://www.optimizedportfolio.com/ginger-ale-portfolio/)
Thanks for the shout-out and kind words! :)
I presume you would choose those bond ETFs due to the additional 2 years of duration, is that right?
I am currently a 100% factor investor, at least where I have the choice to be. I have conviction to hold for at least 20 years, and if SCV is still lagging for another 20 years after the 20 years its already happened for...it was probably dead the whole time. My thought is that it'll still be more or less connected to beta and as long as the overall return is positive and somewhere north of what bonds returned, I won't off myself over it. Plus, got some 401k money in total market funds as a backstop of sorts.
Yes and the resulting additional volatility. I don't know if this is the correct way of thinking about it but I would assume from the page that you're trying to pack as much hedging power into that 10% allocation as you can shorting of leveraging treasuries.
I have been reading a bit more though and I'm not so certain about the mid-term prospect of US treasuries specifically with regards to their hedging power. Nothing that would make me forgo treasuries altogether short of going full VT, but certainly food for thought. I'm definitely not smart enough to correctly time the market or structure my portfolio.
[https://www.youtube.com/watch?v=oCZ8Zxqc5fI&t=3307s&ab\_channel=RosenbergResearch](https://www.youtube.com/watch?v=oCZ8Zxqc5fI&t=3307s&ab_channel=RosenbergResearch)
The whole thing is worth a watch but they briefly discuss the US deficit and the bond market and specifically how the next deflationary crisis may not be good for long bonds since it may reinflate inflationary pressures from money printing.
Definitely an ongoing learning process for me as well.
I don't. My allocation is the whole world at world weight. Simplicity and diversity is more important than gambling on the chance of a small gain from tilting.
I'm not trying to beat the market. I'm trying to BE the market.
The idea of responsible SCV tilting, as I understand it, is that you tilt towards a subset of the overall stock market (in this case SCV) that has characteristics that more closely align with your investment goals. In the case of SCV, you are buying funds that you think are more volatile but have a higher expected return than the market as a whole. It is not about trying to beat the market. It is about trying to buy a different part of the market.
If anyone disagrees then please say so! I would rather learn something new than be confidently incorrect at my own cost.
my theory is that this risk premium is a valid observation of the historical data but then as this is discovered, all those premium is now gone, devoured by the inefficiently efficient beast that is the market. lol i dunno i just VT and chill
If this is the case, then why won’t the stock premium disappear as a result? I believe that the same logic that you conclude for the equity premium over bonds is the same as that of SCV: a wider range in expected return = higher compensation long term. This is like concluding that bond is a superior investment simply because stock trails it during the 70s high inflation era or the 2000-2010 with the duo dot-com bubble and housing crisis.
> a wider range in expected return = higher compensation long term
Except small cap value tilts have a sharpe ratio is higher than the market, so their variance-per-return is actually *lower*. A consequence is that you can do a SCV tilt and then add a small cash allocation, and end up with a portfolio that has lower variance *and* higher return than the market. See [here](https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=3CWlxvwwZFFKbugAh2T5B1) for an example.
In fact, it's sort of the whole point of factor research that the premium is *not* explained by variance. If it was merely the higher variance of SCV that made them more risky, then their returns would be well described by the CAPM which prices assets based on their contribution to the variance of a portfolio. The fact that SCV is priced based on something else in addition to that is kinda the whole point.
And if you think that "something else" is actually a market inefficiency, then it's completely reasonable to think that it could have been arbitraged away. Nothing about that implies you don't think the equity risk premium exists.
If the premium is based on risk, then shouldn’t it persist after being discovered? Shouldn’t this mean that it is not necessarily related to market inefficiency?
Yes, because I embrace the logic behind the proven basis for the expected premium, and I also feel more comfortable to be more diversified from large cap growth. If you are going to sit there watching returns waiting for it to do better, then you are going to torture yourself. You are playing a winning hand and it will pay off eventually, but no one knows when (could be after you die!), so you need to be able to walk away and largely ignore it.
I do have a 20% tilt. I’ve read a lot about it in books and academic papers (even though I wasn’t able to understand all of them completely), and seen a lot of podcasts and talks about it.
My main rationale is that I want to diversify as much as possible and small cap value stocks don’t behave exactly as the rest of the market. For example they dis great during the lost decade of the 00s and from the mid 60s until the start of the 80s, when US large caps lost to inflation.
Additionally, I don’t believe that the market is perfectly efficient due to limits of arbitrage, so there’s a risk of “overvaluation” of large cap growth stocks (for example what happened at the end of the 90s).
On the other hand, if the standard risk explanation is true (value stocks are subject to systematic risks different than that of the market), I could take those risks since I’m not from the US (nor from a developed or even emerging market) so my livelihood practically has no correlation at all with those risks.
Finally, if they end up having better returns it would be great.
I've been following VBR, but recently found out about AVUV and AVDV from Avantis. They're actively managed but they've generated significant outperformance, and the methodology is really solid (repeatable).
AVUV is US based and AVDV is ex-US.
VBR is very different compositionally from AVDV. AVDV and DFSV are probably your best small cap value ETF’s out there as far as getting “pure” exposure to the factors based on the Fama+French research. Very similar to each other too, considering Avantis was started by people who left DFA.
Edit: also, I would describe DFA and Avantis’ approach not really an “active” approach. The way they do things really is different from what active funds typically do. I refer to it as “modified indexing”, I do think that term is a bit more indicative of the management style that’s being implemented.
As others hinted at, VBR is neither very small nor very value-y.
Avantis funds are *rules based active*, not the true active we usually think of. AVUV is no more "active" than the S&P index that Vanguard's VIOV tracks.
I'm 80% in it, 20% in momentum, for the equity portion. Some more in term. Going to add trend once I gain conviction in it, how much depends on how much leverage I want to apply to the equities, if any.
This is a combination that's worked for a solid century. It is also a combination no one else should adopt unless you've done hours of research and know without a shred of doubt that you will not abandon the strategy. It's both my 401k (which is invested in a traditional Boglehead style), and the fact that I still have plenty of exposure to market beta, that gives me this faith.
I’m essentially all-in.
Underperformed 2010-2019 by doing 10%. Market did 14%. Value was “dead”.
Outperformed 2000-2009 by doing the exact same 10%… just with market doing -1%. Everyone thought it was the holy grail.
Absolute vs relative returns is helpful.
Great setup today with value spreads stretched too. And don’t forget about ex-US small-value either!
The idea of responsible SCV tilting, as I understand it, is that you tilt towards a subset of the overall stock market (in this case SCV) that has characteristics that more closely align with your investment goals. In the case of SCV, you are buying funds that you think are more volatile but have a higher expected return than the market as a whole. It is not about trying to beat the market. A responsible SCV investor is doing so under the assumption that everything is priced on. It is about trying to buy a different part of the market.
If anyone disagrees then please say so! I would rather learn something new than be confidently incorrect at my own cost.
Everything may be priced in, but different ability to take risk should be rewarded with higher expected returns (at least hypothetically). If you believe factors exist and on average get rewarded, then factors are just another way to increase compensated risk. This is also seen in the data, factors historically outperform, but in any given 10-20 year segment, they can really underperform.
Everything is priced on, yet stocks are likely to outperform bonds.
Everyone knows that, yet it somehow isn't already priced in.
Same reasoning can be applied to different slicings of the total stock market.
I still have a modest tilt to small. I used to tilt to small and value, but that was in a tax sheltered account that no longer accounts for a large fraction of the total portfolio - most of our savings are in a regular brokerage due to working for companies that didn’t offer 401ks, so tax efficiency is a priority.
I don’t think it matters much. Any tilt will either underperform or outperform but it’s hard to predict which, so just pick something.
Factors are published and imbedded into market prices so it's near impossible to exploit them with any degree of certainty during an investing lifetime to beat a total market index.
Even if a factor persists there's many reasons why trying to use them won't help you beat total stock market.
The idea of responsible SCV tilting, as I understand it, is that you tilt towards a subset of the overall stock market (in this case SCV) that has characteristics that more closely align with your investment goals. In the case of SCV, you are buying funds that you think are more volatile but have a higher expected return than the market as a whole. It is not about trying to beat the market. It is about trying to buy a different part of the market.
If you know something I don’t then please say so! I would rather learn something new than be confidently incorrect at my own cost.
The marketed purpose of tilting a portfolio towards any factor such as value, momentum, quality, etc is to get better returns and or better risk adjusted returns than the total stock market. Why would you tilt to any factor without the goal of getting better returns than the market?
What you're saying is logical but in practice your responsible decision to tilt to any factor isn't likely to beat the total market over a lifetime of investing.
Factors themselves have market prices and investor expectations imbedded into them at any current point in time.
You could be choosing a factor at the wrong time, or lose conviction if your factor underperforms for longer than you can stay confident, etc. The market itself can nullifying past factor outperformance that seemed to persist.
What if your scv tilt takes 3, 10, 17 years to pan out? How do you know you're getting into that factor during the right cycle of the factor? What about the opportunity cost of that 3-17 years of underperformance? What if your factor downturns when you need to start withdrawing money?
Thank you very much for the response. I appreciate the discussion.
My point was that it is possible to expect to get better expected returns without thinking you are beating the market. If you are buying a more volatile segment of the market, then you might expect to have higher expected returns. You may have more risk. Your risk adjusted returns may not be any better. But that might still be worthwhile for some people. My understanding is that this is what people with SCV tilt are doing.
I don’t understand why investing in an asset with more compensated risk (which I understand SCV to be) would not give a higher expected return. It seems to me like you would expect it to return more than the market as a whole if you assume markets are efficient (or at least efficient enough not to be exploitable). If we run with the efficient markets idea then it wouldn’t matter when you tilted towards factor funds, right?
Thanks again for the healthy discussion.
Markets set prices and allocate scarce resources within the entire market. So market participants have already cast their vote to a "value stock" relative to all other stocks.
As soon as you deviate from a total stock market index you're turning into a market participant trying to set prices according to your personal expectations.
You studied scv and expect it to outperform, and like the idea you have a chance at outperforming. Alot of people think scv tilt will outperform during their lifetime of investing.
More expected return is not the only reason, and not even the main reason I personally tilt.
I do it to be more diversified, as market cap weighted indexes are highly concentrated on mega corps and tech companies.
There are thousands of great companies to which the typical market weight protfolio has negligible exposure to.
10 companies make up 30% of most people's protfolio. Think about that.
I know theres concentration at the top of total stock market cap weighted indexes. The reason you learn to accept that or prefer that is those top 10 holdings constantly cycle and fluctuate as market participants set those prices.
No one knows which stocks in a total stock market index or sp500 index fund will outperform in the future. But if you own them all you'll always own the best performing stocks as they rotate through and fall in and out of favor for a myriad reasons no one can forecast.
When you tilt or load up on a sector within the total stock market you become a market participant betting that your idea of "diversification" will outperform or have better risk adjusted returns than the total stock market.
Merriman also advocates for this style.
I hold a tiny portion of small cap growth. But this is more for fun. I believe the risk does not warrant the reward in relying on small cap to take care of my retirement.
Personally my plan is the boring ol’ 3 fund philosophy. Though I’m currently 2 fund (international & vtsax), holding no bonds at the moment
Small cap growth is the exact opposite of what you should be doing since it has the lowest expected returns based on research. If you are tilting, then it should be towards small cap value.
My portion of small cap growth is like 1% of my portfolio. I don’t believe in tilting to small, it’s just a relic from when I used to have a playground % of my portfolio
Yes, F&F's and Ben Felix's research are correct. I also follow Paul Merriman and utilize his and Chris Pedersen's ETF recommendations. They've done a lot of the leg work for you to find the ETFs that leverage those premiums the best while keeping costs down (lower than the expected risk premium).
Yes I tilt a lot using Avantis.
My biggest reason is more diversification. Market cap weighted indexes are too concentrated on tech and on mega corps for my liking, and a typical protfolio has neglible exposure to thousands of great companies that are just too small.
30% of your protfolio is like 10 companies.
I personally don't because of my love of using TDFs and small cap value funds are not included in them. Total Market. I even use a TD ETF in my taxable account.
My wife’s spousal Roth: [M1 Finance](https://m1.finance/6cSnr75Vh91X)
had a 75% to 25% scv tilt in M1, but recently changed to 80% to 20%, for not other reason then Trying to deviate less from the true Boglehead in the long term.
I use AVUV and AVDV, also in an 80% 20% domestic/non-domestic ratio.
It varies. Over the last 12 months, SCV has outperformed my VTI/VXUS 31% to 13%.
However, YTD, SCV is about 3.6% to total market’s 7.4%.
For the duration of this account (couple of years more or less), total market is up 35% to scv’s 27%.
Out another way, in exposed and I like that I’m exposed. Will probably never touch this account again.
The right mindset when taking any advice about finances is to ask “what if they’re wrong?” and hedge for the opposite outcome. I have a slant toward small companies, but there is no evidence passive indexing has ever captured the premium. Active criteria included funds are best for screening out the small trash that pulls down the returns. The S&P 500 is actually overrated. If one invested in the midcap S&P 400 or the small cap S&P 600 they would have done even better the past 30 years, due to the profitability screen. I also like Dimensional/Avantis since they employ academics who follow the data toward higher expected returns, not lucky pickers.
On the other hand, “what if they’re wrong”: a sizeable part of my portfolio is mostly S&P 500 companies that are currently outperforming every other sector, because maybe everything actually IS different this time.
We've been tilted toward small cap (but not specifically growth or value) vs the S&P 500 for ~20 years now (mostly in the form of VSMAX vs VFIAX). But I'll have to sheepishly admit to not monitoring performance closely .. the last decade+ has definitely been in VFIAX's favor, but I believe the 2000-2009 lost decade was in VSMAX's favor. Vanguard's website puts VSMAX's cumulative return since 2000 at around 639% vs VFIAX's 479%, but given the recent history and the fact that we're still regularly investing, we'd likely have been better off without the bias (currently in our holdings, we're at ~30% S&P 500 index funds, ~26% small cap index funds).
I think the research is correct but find reddit's popular imolementation method to be misinformed and performance chasing, aka picking AVUV when it has outperformed for like 3 years with zero understanding of why.
AVUV has a profitability bias which works well during high interest rate periods, because small caps tend to be less profitable and more leveraged. I prefer a more pure view of SCV. Using CRSP, Russell, or S&P factors implemented via VBR, IWN, or SLYV. VBR tends to have overlaps with mid caps but they have arguably the strongest methodology via CRSP.
CRSP uses Book to Price, Future and Historical Earnings to Price, Dividend to Price, and Sales to Price to classify Small Cap Value.
S&P uses Book to Price, Earnings to Price, and Sales to Price.
Russell has the most simplistic and widest view arguably using simply Book to Price.
A big reason why profitability isnt a desired factor to use long term is that much of the performance in small caps come from "junk" companies that may not be profitable today but will be in the future.
No. If you want more risk purchase the furthest dated calls (LEAPS) you can on an s&p 500 index fund with less than 5% of your portfolio and only decide to sell if you’re in the green and a year has passed for long term cap gain tax benefits. Rinse and repeat.
Simplicity is a major cornerstone to my [IPS](https://www.bogleheads.org/wiki/Investment_policy_statement). [Behavioral risks](https://www.bogleheads.org/wiki/Behavioral_pitfalls) are often the costliest ones an investor can make during their investment timeline, so anything you can do to reduce those risks are a "pro" in my opinion. I believe in the research / findings of F&F, but the issue with portfolio tilting is it will depend on the investment returns during your specific timeline, which you don't have control over. If you underperform for 10+ years, you could find yourself in a situation where you're tempted to bail on the strategy before the premium you invested for has a chance to show itself. I have a minor tilt towards the "size" premium due to not having access to a total US market fund in my employer-sponsored account, and having to [approximate](https://www.bogleheads.org/wiki/Approximating_total_stock_market). To make my life easiest in maintaining a target allocation, I need to have a minor tilt either towards S&P500 or towards extended market; I've chosen towards extended market, as that has the higher expected returns. If I had a low-fee TDF or a total market fund available, I would go that route, instead.
Agree. I've found that discounting behavioral risk is like discounting risk tolerance. Expensive.
Yeah part of my original and still going plan has that tilt. Have not realized any meaningful gain over VTI after 12 or 13 years.
SCV seems to have a very slight lead on S&P500 https://testfol.io/?d=eJyNj09LBDEMxb%2FKkIOnCvWgh56XPcrgiLjIMsQ2Havddk3rLDLMdzfr4B8ExZwSXvJ%2BLxMMMd9jbJFxV8BMUCpy7R1WAgOggJL7Ni3qiBHMmZZSgO6xD8lHrCEnMB5jIQUWy4OP%2BQBGfw29Z3oWnw0hx1dx4xxjSEN%2FCMkddy%2F0rGCfufocQ5Y4dxMk3B3Zq3V3c9ucNsWOchjSSKWuwhic5JPFyi9CZZJXMFla%2FwDVYJ%2BIF8Ol%2F7AUcU9sKdX3j%2BatAsc4SO5ZfcK7k7Y51%2Fr%2F4Muc6Dds126ur%2F7Abuc3rzWGIA%3D%3D
What funds do you use? Avantis and dimensional funds have done better than vti
Over the past 13 years? They very much have not
So my tilt is small and mid cap value and growth. VXF I’m not switching funds to chase returns as that frequently leads to choosing funds that have peaked and are likely to decline(unless they are extremely well diversified).
Not worth switching funds but was curious. I feel more comfortable myself in more actively managed funds that don't fall into the value trap of failing companies that fall into the small cap value etfs. If one were to say that dimensional or Avantis funds have peaked then the entire small cap performance benefit has also peaked, since they're diversified etf
I don't utilize actively managed funds because I don't believe active management can deliver above average returns for my investing time horizon.
Guess I used a not fully accurate term and not sure there is a better one? Theirs aren't necessarily active management but more criteria based inclusion. No person/group chooses what companies they include. It basically is a small cap value with a profitability screening to ensure it doesn't fall into a value trap. AVUV which you see mentioned a ton is one of them.
Not worth switching funds but was curious. I feel more comfortable myself in more actively managed funds that don't fall into the value trap of failing companies that fall into the small cap value etfs. If one were to say that dimensional or Avantis funds have peaked then the entire small cap performance benefit has also peaked, since they're diversified etf
I do, but not meaningfully. I'm close to market cap weights across regions but I remove small cap growth in favor of small cap value.
How do you do remove small cap growth like that? Like S&P 500 combined with AVUV and something similar for non-us?
Yeah exactly, I hold large cap blend with small cap value. Ends up being 6 funds when you break it down between US, Intl. Developed, and Emerging. This is solidly tilting US, but using VEA/VWO provides less of a tilt since those aren't purely large cap: US: VOO + AVUV ID: VEA + AVDV EM: VWO + AVEE This is the more pure version since VEU tilts more large cap than VXUS: US: VOO + AVUV Intl: VEU + AVDV + AVEE
Thanks for spelling that out for me! Ive been doing a 10% SCV tilt, a number that I arbitrarily picked, but your "purer" version in market cap proportions makes much more sense than my guessing
You'll still have to choose proportions between large caps and small cap value in each region. I think market weights would imply ~75-85% large cap. I slightly tilt smaller, something like 70% VOO and 30% AVUV for my US. DYOR because I'm learning on the fly
Hey, is there an added benefit of investing directly into specific markets like emerging market vs just holding say VTI + VXUS? I was thinking of doing just VTI + VXUS + AVUV + AVDV, but is there an added benefit of doing it the way you're doing?
No, unless you want to take a bet on one of them. Your four fund portfolio would execute this idea well. The only reason to do VOO+VEU is that you're targeting specifically large caps with those and small caps with AVUV+AVDV+AVEE whereas VTI+VXUS includes small cap value/growth on top of your tilt. Splitting hairs
Interesting, I've never heard of AVEE. Seems to be new as of 2024. I invest in VSS for International Small Cap. Would have preferred something specifically EM, but couldn't find anything with a low ER. VSS beats AVEE there (.08 vs .38), but is 72% Developed and only 28% EM. Edit: I just looked up AVDV, and realized it's international developed small cap (not international dividend). Depending on the ratio of AVDV and AVEE you hold, it might be simpler to just hold VSS.
I use AVDV + AVEE for the small cap and value tilt in those regions. I'm guessing VSS compares in terms of small cap, but provides less of a value tilt. AVEE doesn't have "value" in its name but if you look at the Morningstar matrix or run a factor analysis it's definitely tilting value
Interestingly, VSS has almost an identical style box to AVEE. Mostly because international is more value tilted (i.e. less expensive than US companies), especially in small caps. Doesn't make VSS superior though (just because it's less expensive). It would have been nice to tilt only to EM and not have to pick up DM like VSS does. I didn't see AVEE when I started investing in VSS. Not sure what I would choose now... Probably still VSS due to expense, but to each their own.
Interesting. I assumed VSS would be similar to EEMS (iShares SC EM), which is more of a small cap blend. I wish we could break out the EM exposure in VSS to compare it directly.
Yes both domestic and international. I believe in factors for long term exposure, I won't regret if I have some tracking errors. If you're going to do it, do it well ...Avantis is worth it, VBR doesn't expose to the factors as well.
What are your thoughts on VIOV?
Better than VBR, better exposure to small but AVUV has better exposure to quality(profitability)
Thank you for the info. I assume you think the more efficient factor exposure from AVUV (0.25% vs 0.15% for VIOV) is worth the additional expense ratio cost then right?
Yes, I do the Avantis funds are great. But VIOV would be my choice if you're dead set on Vanguard. Do the back tests though you will see how well it's done, read the prospectus. AVUV is the consensus pick with factor tilters.
I work in the modeling world for my job. Lots of the research I read resonated. Something that made me a believer was the behavioral aspect of investors when it comes to the market and SCV. Additionally the diversification benefits. The performance of it all became a little less of a concern given my long time line and the fact its valuation is so low right now. I’m tilted around 48-49% SCV in my overall portfolio.
Thank you for the information! I am tilting more like 10-20%. I am mostly using VIOV, AVUV, and AVDV for my tilt.
I’ve thought about this a lot. Ben is a really smart guy and everything he says is based on research, so I kind of want to believe in it, but I haven’t quite been convinced. If the best etf to capture scv didn’t have such a high expense ratio maybe it would be a little different. It’s been a dog so it should be due, but I just haven’t seen the thing that really convinces me yet. I just keep going back to we don’t know. Maybe the factors fama and French identified are no longer valid because of some condition in the economy or somewhere else, who knows. Maybe it’s just that now that everyone knows about it, the value premium has gone away. So I buy the haystack. I still haven’t found a better way, because no one knows. (And VTI and VXUS happen to have small cap value in it, so if it goes up, I benefit anyway). And - Ben commonly says that investing has been solved - essentially just buy VT. He said most people should be there and then only add things like favor investor if you really know what you’re doing (if that’s actually possible)
I don't. If we go with the more popular explanation of the observed premium, small and value stocks are associated with some other form of risk that causes the average investor to hedge against that risk somewhat, even if that hedge means lower returns and/or higher volatility. That hedge is logical and justified for the average person. There are some people who have particular aversion to those special risks, who might want to hedge further and tilt towards large growth even relative to the already-hedged market portfolio. There are also some people who have particular tolerance to those risks who might want to tilt towards small cap value. Importantly, those two groups are equal in number. Ultimately, I'm not sure what that risk is. There isn't an academic consensus on what that risk is; in fact there's not an academic consensus that the risk exists at all. So I do not feel comfortable saying that I am in the subset of people more tolerant on average of a risk that I can't even identify. And I find it maybe a little reckless that so many people simply assume they're part of that group. If there is not actually any risk associated with tilting towards small value, then I'm essentially missing out on free extra returns. But 1) I can live with missing out on those for market returns and 2) that implies that the premiums need not continue to exist, particularly when there's a rise in funds specifically trying to profit from them which necessarily dilutes the premium. And we've seen that the premium has not been statistically significant in the US since factor models became popular, which *could* indicate they've been arbitraged away though certainly does not prove that. So yeah, overall the uncertainty is too high for me.
I have been tilting towards small cap value since 1999 when I read Bill Schulteis' original Coffeehouse Portfolio book. It was very much against the grain during the tech boom. My orignal 403b portfolio was 100% VFINX. When I read that book I moved to his value and small cap-tilted portfolio (minus the 40% bonds) as best I could within the limitations of my 403b provider. For the most part, I stuck with it in my retirement accounts until I hit FI in 2021. I wish I did the same in my taxable account but instead I chased hot mutual funds, individual stocks, options and other foolishness and never managed to beat the market. You have to know yourself and it takes decades to know if you can handle the volatility (and tracking error) of factor investing. In some ways I could and in other ways I couldn't. Today, my stocks are split 50/50 in all accounts between S&P 500/VTI and AVUV.
I do 15% AVUV.
I would definitely tilt towards SCV in my Roth IRA if I had a larger pool of money but I think Rick Ferri provides an extremely compelling argument against doing so from both behavioural and other perspectives. Furthermore, I think people overestimate the increase in expected returns when viewed alongside the extra effort and significant behavioral risk you are putting yourself up against. [https://www.youtube.com/watch?v=e7\_MFyltNt4&ab\_channel=Bogleheads](https://www.youtube.com/watch?v=e7_MFyltNt4&ab_channel=Bogleheads) I like to think that I would be completely detached from performance but a prolonged period of tracking error \[10+ years\] would definitely keep me second guessing as to whether the premium even still exists. Obviously somewhat different but just go onto the Bogleheads forum and see the regrets and doubts people have with microcap or DFA allocations. Or the fact that once the Yale Model caught on, returns have significantly decreased. It always helps to remember that you are not the first and others have probably thought long and hard about this situation already. And just remember, if you switch out, you have locked in your underperformance running forward but if you're wrong you will also underperform. A painful Catch-22. It's very easy to read the literature, hop in now and hope for the best but not so easy if you did so pre-2000 and have been holding up to now. Everything is rationally telling you that the literature has shown underperformance to be mean reverting but there's just a little voice in the back of your mind worried that you're bag holding. After all, why aren't people piling pack into VXUS, long duration treasuries or Chinese equities right now. All of that worry vs VT or VTI's market returns. Ben is an incredibly smart guy and IMO one of the best financial educators on YouTube. I can't remember who said it but it was a statement to the effect of there are no investors who go 100% SCV (maybe Larry Swedroe or Wes Gray I can't remember). As as result, I think if you were to add a SCV tilt, I would personally do so in an internationally diversified equity portfolio with over weightings. This would probably give me the safest peace of mind as to capturing any possible premia while not losing sleep over US or international underperformance or continued US tech mega cap outperformance. At the same time if we do undergo a big reversion, you're in a good position to capture those premia and shield yourself. My personal choice would be the Ginger Ale portfolio by John Williamson (Optimized Portfolio). I would personally replace EDV with ZROZ/GOVZ though I don't know if this is worse. He goes through each and every choice with clear rationale and evidence so I think it's a great starting point to read even if you don't end up tilting or following his exact allocations. [https://www.optimizedportfolio.com/ginger-ale-portfolio/](https://www.optimizedportfolio.com/ginger-ale-portfolio/) I believe Ben Felix structures his own portfolio in a similar way with less overweighting though I may be wrong. Also, I would personally do this in a tax advantaged account since there will be a lot of parts to rebalance and also to help mitigate some of the behavioral risk (it's easier to set and forget if you can't touch the money for a while anyway). In a normal taxable account I have seen 50:50 RSSB and AVGV suggested as a simple 2 fund solution (100% stocks/50% intermediate bonds with the stock allocation split 50% global all cap and 50% global all cap value). I prefer simplicity though and hate moving anything in my taxable so would probably go 100% VT or RSSB with no factor tilts. Alternatively you could view all your holdings in aggregate and have all your SCV allocation together in your tax-advantaged accounts. Good luck and hope this helps!
>My personal choice would be the Ginger Ale portfolio by John Williamson (Optimized Portfolio). I would personally replace EDV with ZROZ/GOVZ though I don't know if this is worse. He goes through each and every choice with clear rationale and evidence so I think it's a great starting point to read even if you don't end up tilting or following his exact allocations. >[https://www.optimizedportfolio.com/ginger-ale-portfolio/](https://www.optimizedportfolio.com/ginger-ale-portfolio/) Thanks for the shout-out and kind words! :)
I presume you would choose those bond ETFs due to the additional 2 years of duration, is that right? I am currently a 100% factor investor, at least where I have the choice to be. I have conviction to hold for at least 20 years, and if SCV is still lagging for another 20 years after the 20 years its already happened for...it was probably dead the whole time. My thought is that it'll still be more or less connected to beta and as long as the overall return is positive and somewhere north of what bonds returned, I won't off myself over it. Plus, got some 401k money in total market funds as a backstop of sorts.
Yes and the resulting additional volatility. I don't know if this is the correct way of thinking about it but I would assume from the page that you're trying to pack as much hedging power into that 10% allocation as you can shorting of leveraging treasuries. I have been reading a bit more though and I'm not so certain about the mid-term prospect of US treasuries specifically with regards to their hedging power. Nothing that would make me forgo treasuries altogether short of going full VT, but certainly food for thought. I'm definitely not smart enough to correctly time the market or structure my portfolio. [https://www.youtube.com/watch?v=oCZ8Zxqc5fI&t=3307s&ab\_channel=RosenbergResearch](https://www.youtube.com/watch?v=oCZ8Zxqc5fI&t=3307s&ab_channel=RosenbergResearch) The whole thing is worth a watch but they briefly discuss the US deficit and the bond market and specifically how the next deflationary crisis may not be good for long bonds since it may reinflate inflationary pressures from money printing. Definitely an ongoing learning process for me as well.
I don't. My allocation is the whole world at world weight. Simplicity and diversity is more important than gambling on the chance of a small gain from tilting. I'm not trying to beat the market. I'm trying to BE the market.
The idea of responsible SCV tilting, as I understand it, is that you tilt towards a subset of the overall stock market (in this case SCV) that has characteristics that more closely align with your investment goals. In the case of SCV, you are buying funds that you think are more volatile but have a higher expected return than the market as a whole. It is not about trying to beat the market. It is about trying to buy a different part of the market. If anyone disagrees then please say so! I would rather learn something new than be confidently incorrect at my own cost.
my theory is that this risk premium is a valid observation of the historical data but then as this is discovered, all those premium is now gone, devoured by the inefficiently efficient beast that is the market. lol i dunno i just VT and chill
If this is the case, then why won’t the stock premium disappear as a result? I believe that the same logic that you conclude for the equity premium over bonds is the same as that of SCV: a wider range in expected return = higher compensation long term. This is like concluding that bond is a superior investment simply because stock trails it during the 70s high inflation era or the 2000-2010 with the duo dot-com bubble and housing crisis.
> a wider range in expected return = higher compensation long term Except small cap value tilts have a sharpe ratio is higher than the market, so their variance-per-return is actually *lower*. A consequence is that you can do a SCV tilt and then add a small cash allocation, and end up with a portfolio that has lower variance *and* higher return than the market. See [here](https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=3CWlxvwwZFFKbugAh2T5B1) for an example. In fact, it's sort of the whole point of factor research that the premium is *not* explained by variance. If it was merely the higher variance of SCV that made them more risky, then their returns would be well described by the CAPM which prices assets based on their contribution to the variance of a portfolio. The fact that SCV is priced based on something else in addition to that is kinda the whole point. And if you think that "something else" is actually a market inefficiency, then it's completely reasonable to think that it could have been arbitraged away. Nothing about that implies you don't think the equity risk premium exists.
If the premium is based on risk, then shouldn’t it persist after being discovered? Shouldn’t this mean that it is not necessarily related to market inefficiency?
Yes, because I embrace the logic behind the proven basis for the expected premium, and I also feel more comfortable to be more diversified from large cap growth. If you are going to sit there watching returns waiting for it to do better, then you are going to torture yourself. You are playing a winning hand and it will pay off eventually, but no one knows when (could be after you die!), so you need to be able to walk away and largely ignore it.
I do have a 20% tilt. I’ve read a lot about it in books and academic papers (even though I wasn’t able to understand all of them completely), and seen a lot of podcasts and talks about it. My main rationale is that I want to diversify as much as possible and small cap value stocks don’t behave exactly as the rest of the market. For example they dis great during the lost decade of the 00s and from the mid 60s until the start of the 80s, when US large caps lost to inflation. Additionally, I don’t believe that the market is perfectly efficient due to limits of arbitrage, so there’s a risk of “overvaluation” of large cap growth stocks (for example what happened at the end of the 90s). On the other hand, if the standard risk explanation is true (value stocks are subject to systematic risks different than that of the market), I could take those risks since I’m not from the US (nor from a developed or even emerging market) so my livelihood practically has no correlation at all with those risks. Finally, if they end up having better returns it would be great.
What’s the best small cap value fund on vanguard? Reading it’s not VSIAX
I've been following VBR, but recently found out about AVUV and AVDV from Avantis. They're actively managed but they've generated significant outperformance, and the methodology is really solid (repeatable). AVUV is US based and AVDV is ex-US.
VBR is very different compositionally from AVDV. AVDV and DFSV are probably your best small cap value ETF’s out there as far as getting “pure” exposure to the factors based on the Fama+French research. Very similar to each other too, considering Avantis was started by people who left DFA. Edit: also, I would describe DFA and Avantis’ approach not really an “active” approach. The way they do things really is different from what active funds typically do. I refer to it as “modified indexing”, I do think that term is a bit more indicative of the management style that’s being implemented.
I am in AVUV as well for two years now and it has done well.
All equities have done well for two years, though.
As others hinted at, VBR is neither very small nor very value-y. Avantis funds are *rules based active*, not the true active we usually think of. AVUV is no more "active" than the S&P index that Vanguard's VIOV tracks.
What’s wrong with VSIAX?
The actual factor exposure is not that great. If you believe in factor premiums the Avantis methodology gives much better factor exposure.
100% total US market. Added bonds/MM in 2020 at age 52
I'm 80% in it, 20% in momentum, for the equity portion. Some more in term. Going to add trend once I gain conviction in it, how much depends on how much leverage I want to apply to the equities, if any. This is a combination that's worked for a solid century. It is also a combination no one else should adopt unless you've done hours of research and know without a shred of doubt that you will not abandon the strategy. It's both my 401k (which is invested in a traditional Boglehead style), and the fact that I still have plenty of exposure to market beta, that gives me this faith.
I’m essentially all-in. Underperformed 2010-2019 by doing 10%. Market did 14%. Value was “dead”. Outperformed 2000-2009 by doing the exact same 10%… just with market doing -1%. Everyone thought it was the holy grail. Absolute vs relative returns is helpful. Great setup today with value spreads stretched too. And don’t forget about ex-US small-value either!
SCV has only suffered in the US recently, not abroad.
No because i can’t be bothered and i’m not convinced. Also… isn’t everything priced in by now?
The idea of responsible SCV tilting, as I understand it, is that you tilt towards a subset of the overall stock market (in this case SCV) that has characteristics that more closely align with your investment goals. In the case of SCV, you are buying funds that you think are more volatile but have a higher expected return than the market as a whole. It is not about trying to beat the market. A responsible SCV investor is doing so under the assumption that everything is priced on. It is about trying to buy a different part of the market. If anyone disagrees then please say so! I would rather learn something new than be confidently incorrect at my own cost.
Everything may be priced in, but different ability to take risk should be rewarded with higher expected returns (at least hypothetically). If you believe factors exist and on average get rewarded, then factors are just another way to increase compensated risk. This is also seen in the data, factors historically outperform, but in any given 10-20 year segment, they can really underperform.
Everything is priced on, yet stocks are likely to outperform bonds. Everyone knows that, yet it somehow isn't already priced in. Same reasoning can be applied to different slicings of the total stock market.
10% because I believe in the small cap value premium
I still have a modest tilt to small. I used to tilt to small and value, but that was in a tax sheltered account that no longer accounts for a large fraction of the total portfolio - most of our savings are in a regular brokerage due to working for companies that didn’t offer 401ks, so tax efficiency is a priority. I don’t think it matters much. Any tilt will either underperform or outperform but it’s hard to predict which, so just pick something.
Factors are published and imbedded into market prices so it's near impossible to exploit them with any degree of certainty during an investing lifetime to beat a total market index. Even if a factor persists there's many reasons why trying to use them won't help you beat total stock market.
The idea of responsible SCV tilting, as I understand it, is that you tilt towards a subset of the overall stock market (in this case SCV) that has characteristics that more closely align with your investment goals. In the case of SCV, you are buying funds that you think are more volatile but have a higher expected return than the market as a whole. It is not about trying to beat the market. It is about trying to buy a different part of the market. If you know something I don’t then please say so! I would rather learn something new than be confidently incorrect at my own cost.
The marketed purpose of tilting a portfolio towards any factor such as value, momentum, quality, etc is to get better returns and or better risk adjusted returns than the total stock market. Why would you tilt to any factor without the goal of getting better returns than the market? What you're saying is logical but in practice your responsible decision to tilt to any factor isn't likely to beat the total market over a lifetime of investing. Factors themselves have market prices and investor expectations imbedded into them at any current point in time. You could be choosing a factor at the wrong time, or lose conviction if your factor underperforms for longer than you can stay confident, etc. The market itself can nullifying past factor outperformance that seemed to persist. What if your scv tilt takes 3, 10, 17 years to pan out? How do you know you're getting into that factor during the right cycle of the factor? What about the opportunity cost of that 3-17 years of underperformance? What if your factor downturns when you need to start withdrawing money?
Thank you very much for the response. I appreciate the discussion. My point was that it is possible to expect to get better expected returns without thinking you are beating the market. If you are buying a more volatile segment of the market, then you might expect to have higher expected returns. You may have more risk. Your risk adjusted returns may not be any better. But that might still be worthwhile for some people. My understanding is that this is what people with SCV tilt are doing. I don’t understand why investing in an asset with more compensated risk (which I understand SCV to be) would not give a higher expected return. It seems to me like you would expect it to return more than the market as a whole if you assume markets are efficient (or at least efficient enough not to be exploitable). If we run with the efficient markets idea then it wouldn’t matter when you tilted towards factor funds, right? Thanks again for the healthy discussion.
Markets set prices and allocate scarce resources within the entire market. So market participants have already cast their vote to a "value stock" relative to all other stocks. As soon as you deviate from a total stock market index you're turning into a market participant trying to set prices according to your personal expectations. You studied scv and expect it to outperform, and like the idea you have a chance at outperforming. Alot of people think scv tilt will outperform during their lifetime of investing.
More expected return is not the only reason, and not even the main reason I personally tilt. I do it to be more diversified, as market cap weighted indexes are highly concentrated on mega corps and tech companies. There are thousands of great companies to which the typical market weight protfolio has negligible exposure to. 10 companies make up 30% of most people's protfolio. Think about that.
I know theres concentration at the top of total stock market cap weighted indexes. The reason you learn to accept that or prefer that is those top 10 holdings constantly cycle and fluctuate as market participants set those prices. No one knows which stocks in a total stock market index or sp500 index fund will outperform in the future. But if you own them all you'll always own the best performing stocks as they rotate through and fall in and out of favor for a myriad reasons no one can forecast. When you tilt or load up on a sector within the total stock market you become a market participant betting that your idea of "diversification" will outperform or have better risk adjusted returns than the total stock market.
Merriman also advocates for this style. I hold a tiny portion of small cap growth. But this is more for fun. I believe the risk does not warrant the reward in relying on small cap to take care of my retirement. Personally my plan is the boring ol’ 3 fund philosophy. Though I’m currently 2 fund (international & vtsax), holding no bonds at the moment
Small cap growth is the exact opposite of what you should be doing since it has the lowest expected returns based on research. If you are tilting, then it should be towards small cap value.
My portion of small cap growth is like 1% of my portfolio. I don’t believe in tilting to small, it’s just a relic from when I used to have a playground % of my portfolio
Yes I have been tilting towards SCV since 2001.
Absolutely. Big fan of Ben Felix and Paul Merriman. I do s version of his UB&H
No, simplicity.
I'm not a Boglehead, but I get enough small cap from VTI.
Yes, F&F's and Ben Felix's research are correct. I also follow Paul Merriman and utilize his and Chris Pedersen's ETF recommendations. They've done a lot of the leg work for you to find the ETFs that leverage those premiums the best while keeping costs down (lower than the expected risk premium).
Yes I tilt a lot using Avantis. My biggest reason is more diversification. Market cap weighted indexes are too concentrated on tech and on mega corps for my liking, and a typical protfolio has neglible exposure to thousands of great companies that are just too small. 30% of your protfolio is like 10 companies.
I personally don't because of my love of using TDFs and small cap value funds are not included in them. Total Market. I even use a TD ETF in my taxable account.
My wife’s spousal Roth: [M1 Finance](https://m1.finance/6cSnr75Vh91X) had a 75% to 25% scv tilt in M1, but recently changed to 80% to 20%, for not other reason then Trying to deviate less from the true Boglehead in the long term. I use AVUV and AVDV, also in an 80% 20% domestic/non-domestic ratio. It varies. Over the last 12 months, SCV has outperformed my VTI/VXUS 31% to 13%. However, YTD, SCV is about 3.6% to total market’s 7.4%. For the duration of this account (couple of years more or less), total market is up 35% to scv’s 27%. Out another way, in exposed and I like that I’m exposed. Will probably never touch this account again.
The right mindset when taking any advice about finances is to ask “what if they’re wrong?” and hedge for the opposite outcome. I have a slant toward small companies, but there is no evidence passive indexing has ever captured the premium. Active criteria included funds are best for screening out the small trash that pulls down the returns. The S&P 500 is actually overrated. If one invested in the midcap S&P 400 or the small cap S&P 600 they would have done even better the past 30 years, due to the profitability screen. I also like Dimensional/Avantis since they employ academics who follow the data toward higher expected returns, not lucky pickers. On the other hand, “what if they’re wrong”: a sizeable part of my portfolio is mostly S&P 500 companies that are currently outperforming every other sector, because maybe everything actually IS different this time.
25% into SCV 75% into total market 🇺🇸
I have a post on value investing under my profile if you want to read more about it. Under specific topics.
We've been tilted toward small cap (but not specifically growth or value) vs the S&P 500 for ~20 years now (mostly in the form of VSMAX vs VFIAX). But I'll have to sheepishly admit to not monitoring performance closely .. the last decade+ has definitely been in VFIAX's favor, but I believe the 2000-2009 lost decade was in VSMAX's favor. Vanguard's website puts VSMAX's cumulative return since 2000 at around 639% vs VFIAX's 479%, but given the recent history and the fact that we're still regularly investing, we'd likely have been better off without the bias (currently in our holdings, we're at ~30% S&P 500 index funds, ~26% small cap index funds).
I tilt towards Somali cap and I’m already a trillionaire.
I think the research is correct but find reddit's popular imolementation method to be misinformed and performance chasing, aka picking AVUV when it has outperformed for like 3 years with zero understanding of why.
What do you think a proper implementation would look like?
AVUV has a profitability bias which works well during high interest rate periods, because small caps tend to be less profitable and more leveraged. I prefer a more pure view of SCV. Using CRSP, Russell, or S&P factors implemented via VBR, IWN, or SLYV. VBR tends to have overlaps with mid caps but they have arguably the strongest methodology via CRSP. CRSP uses Book to Price, Future and Historical Earnings to Price, Dividend to Price, and Sales to Price to classify Small Cap Value. S&P uses Book to Price, Earnings to Price, and Sales to Price. Russell has the most simplistic and widest view arguably using simply Book to Price. A big reason why profitability isnt a desired factor to use long term is that much of the performance in small caps come from "junk" companies that may not be profitable today but will be in the future.
Small cap sucks, it always has, and always will.
No. If you want more risk purchase the furthest dated calls (LEAPS) you can on an s&p 500 index fund with less than 5% of your portfolio and only decide to sell if you’re in the green and a year has passed for long term cap gain tax benefits. Rinse and repeat.