Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Bias toward small cap and value - how much?
Old 01-10-2008, 06:14 AM   #1
Full time employment: Posting here.
 
Join Date: Oct 2007
Location: New York
Posts: 898
Bias toward small cap and value - how much?

Question for the index-investing asset allocators out there.

Of your US allocation, what % do you have in small vs large, and what % is value vs. growth/market?

I have a bit of a value bias (compared to buying total market) but I'm considering titling that way even more. Same with small (and small value).

Keep in mind, I'm relatively young (39) and can tolerate some extra vol.
__________________
Money's just something you need in case you don't die tomorrow.
Maurice is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-10-2008, 06:57 AM   #2
Full time employment: Posting here.
tightasadrum's Avatar
 
Join Date: Aug 2006
Location: athens
Posts: 802
I don't have a clue about small cap. But I haven't deliberately bought any small cap, but I'm sure some of the funds I own have some. Now I do have some emerging market ETF, but that's probably less than 3%. I may increase that over time. OH, Value fund is at about 4%.
__________________
Can't you see yourself in the nursing home saying, " Darn! Wish I'd spent more time at the office instead of wasting time with family and friends."
tightasadrum is offline   Reply With Quote
Old 01-10-2008, 07:07 AM   #3
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
John Bogle in his "Common Sense" book is lukewarm about both small and value tilts. He acknowledges that they have an historic edge over the TSM but implies that this is no more predictive of future cycles than any other kind of tilt.

He's pretty much a total market guy still.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 01-10-2008, 07:12 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
Personally I think there is enough noncorrelation between large caps and small caps that I prefer to own them as separate asset classes instead of a "total market" fund which is generally cap-weighted and thus 90-95% large cap.

Out of my U.S. equities allocation, about 2/3 is large cap and 1/3 is small cap and mid cap. This is much heavier in small caps than a cap-weighted total market index. From 2001 to 2006, this proved to be a major boost to my return (especially in '01 through '03). In 2007 and so far in 2008, it is an impediment.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 01-10-2008, 07:49 AM   #5
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Quote:
Originally Posted by ziggy29 View Post
Out of my U.S. equities allocation, about 2/3 is large cap and 1/3 is small cap and mid cap. This is much heavier in small caps than a cap-weighted total market index. From 2001 to 2006, this proved to be a major boost to my return (especially in '01 through '03). In 2007 and so far in 2008, it is an impediment.
Yep, I think that was Bogle's point. I guess if you anticipated withdrawals in the next 5 years the tilt may increase your odds of having something doing well at that time to take from. If you're letting it run for 10-15 years, it probably doesn't much matter.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 01-10-2008, 08:03 AM   #6
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,455
U.S. allocation:
1/4 large growth
1/4 large value
1/4 small growth
1/4 small value
Spanky is offline   Reply With Quote
Old 01-10-2008, 08:04 AM   #7
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: west bloomfield MI
Posts: 2,223
I'm not an index investor, by any stretch. If I get to choose between managed and index, I'll go with managed more times than not.

That being said, the TSM is about 75% large cap, and 25% "other" (mid and small), correct?

There is a clear benefit, in my portfolio to owning pure mid caps and pure small caps. I have also seen a huge edge to small value over time (based on experience of investing for 11 years). One issue though is most small cap funds which are good close before they get to big. Managed ones at least.

My domestic mid cap fund was my best performing fund of 2007 on the domestic side. A couple of my international funds beat it, but none of my domestic stock or bonds funds even came close.

RPMGX was the mid cap fund (don't get too excited- it is closed to new investors). 17% return for 2007.

I believe their is a significant gain holding small caps, and tilting towards value. Most of my portfolio is value oriented to begin with. I sprinkle on some growth, but at this time not much.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 01-10-2008, 06:43 PM   #8
Full time employment: Posting here.
 
Join Date: Oct 2007
Location: New York
Posts: 898
THanks for the replies, everyone.

Spanky - thats where I'm headed too, I think - 25/25/25/25.
__________________
Money's just something you need in case you don't die tomorrow.
Maurice is offline   Reply With Quote
Old 01-10-2008, 07:33 PM   #9
Full time employment: Posting here.
 
Join Date: Oct 2007
Posts: 623
Relative weights of US equity AA:

Total Stock Market 1.5
Large Value 1.5
Small 1.5
Small Value 1.5
REIT 1.0
__________________
"Making deliberate choices about how to spend your money and your time is the essence of making the most of your life energy." -Bill Perkins, Die With Zero

"I've traded love for pennies, sold my soul for less" -Jim Croce, Age
TickTock is online now   Reply With Quote
Old 01-10-2008, 09:05 PM   #10
Full time employment: Posting here.
Retire Soon's Avatar
 
Join Date: Nov 2005
Posts: 655
Quote:
Originally Posted by Rich_in_Tampa View Post
John Bogle in his "Common Sense" book is lukewarm about both small and value tilts. He acknowledges that they have an historic edge over the TSM but implies that this is no more predictive of future cycles than any other kind of tilt.

He's pretty much a total market guy still.
I agree with this post. I place my trust in John Bogle. Vanguard Total Stock Market Index is the way to go as this fund represents the broader market in its entirety. Any other allocation and you may end up zigging when you should have zagged. The cost of being wrong can be enormous.
Retire Soon is offline   Reply With Quote
Old 01-11-2008, 03:28 AM   #11
Full time employment: Posting here.
 
Join Date: Oct 2007
Location: New York
Posts: 898
I agree with the post too, in that it accurately describes Bogle's view.

My own view, though, is that I'll do better over time with more of a value and small market tilt. The evidence points that way, and the theoretical basis for it seems pretty solid as well.
__________________
Money's just something you need in case you don't die tomorrow.
Maurice is offline   Reply With Quote
Old 01-11-2008, 06:52 AM   #12
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Quote:
Originally Posted by Maurice View Post
I agree with the post too, in that it accurately describes Bogle's view.

My own view, though, is that I'll do better over time with more of a value and small market tilt. The evidence points that way, and the theoretical basis for it seems pretty solid as well.
I have no disagreement with your strategy, but for me the evidence reflects "cycles" -- only time will tell. Really, a small or value tilt may be just another form of market timing, albeit on a macro scale. And the TSM will track small and value as they grow in any event.

Speculation and philosophy either way. I am not looking for an edge, just a fair stake in the market. May we all win.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 01-11-2008, 07:42 AM   #13
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
You can check out Bogle's more recent views of small/value tilting at The Telltale Chart.

Quote:
In any event, place me squarely in the camp of the contrarians who don't accept the inherent superiority of value strategies over growth strategies. I've been excoriated for my views, but I'm comforted by this reported exchange between Dr. Fama and a participant at a recent investment conference: "What do you say to otherwise intelligent people like Jack Bogle who examine this same data and conclude that there is no size or value premium?" His response: "How far are they from the slide? If I get far enough away, I don't see it either . . . Whether you decide to tilt towards value depends on whether you are willing to bear the associated risk . . . The market portfolio is always efficient . . . For most people, the market portfolio is the most sensible decision." Amen!
Also, I'm not real sure how stable any small or value premia were, or will be in the future. The value premium has definitely been more stable than the small premium. As for me, if I could I'd start with the TSM, and then tilt with a sv index fund until I got the tilt I wanted. But because of retirement plan limitations, I'm just doing a value tilt for now. Smartly, or luckily, my choice of very high quality fixed income [TIPS and VBMFX] nicely offset the recent tanking of my value fund(s).

Edited to add: you should also think about if a value or small tilt could actually be riskier for you personally. For example, you don't want small and/or value to be doing terrible when you could lose your job. Likewise, for all those people that that work(ed) in high tech, their job security was very exposed to similar risks to which growth/tech companies and their stocks were exposed.

- Alec
ats5g is offline   Reply With Quote
Old 01-11-2008, 07:44 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 12,880
Here's mine, and the Vanguard Robot's opinion of it:
MarketCap.jpg
__________________
Al
TromboneAl is offline   Reply With Quote
Old 01-11-2008, 09:04 AM   #15
Moderator Emeritus
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 47,472
I have read in several articles that small caps often do poorly in a recession since it is more likely for a small business to just fold when stressed. The idea is that large caps often do better in a recession, depending on inflation.

Not that I'd figure my AA depending on that, but maybe that explains Bogle's views despite how well small caps have done during some years.

Trying to learn... (thanks for your patience)

Comments?

There are a million articles that seem to imply this, but a couple of them are
Cracking The Small-Cap Code - Forbes.com and
http://www.wachoviasec.com/wachovias...mm09-10-07.pdf
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.

Happily retired since 2009, at age 61. Best years of my life by far!
W2R is offline   Reply With Quote
Old 01-11-2008, 10:20 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,483
I almost never change my AA on small cap and mid cap:

Small cap 15%
Mid cap 15%

I play around a lot more with large cap and global/intl

When the market rebounded from October 2002 to 2005, my small cap and mid caps dragged my portfolio back to even and above faster than anything else.
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 01-11-2008, 12:41 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 10,252
A small or value tilt is any percentages of small and/or value that are more than the total market weights. From the http://www.early-retirement.org/foru...tml#post580844 thread, one can see what the Morningstar 9-box style grid looks like for a 'total market' and also for a DFA-style fully-tilted small/value portfolios.

A total market weight appears to have 72% large, 19% mid and 9% small cap.

Anyways, take a look at the link which has specific numbers. You can plug in your own funds into the M* X-ray analysis tool to get your own numbers.

Our portfolio has numbers somewhere in between the total market and the fully-tilted portfolios. What are your numbers?
LOL! is offline   Reply With Quote
Old 02-09-2008, 08:48 AM   #18
Recycles dryer sheets
 
Join Date: Jun 2007
Posts: 183
More info on this (I love this topic).

It seems not to matter how one gets their tilts. The prevailing theory is that value and small companies are riskier, so if you have two portfolios with the same 'factor loadings' to value and small you should have the same expected return.

In my case, I use only TSM / SV in order to keep things simpler.

There is a lot written about the persistance of small and value premia. Keep in mind that its not guaranteed (otherwise there would be no return premium because there would not be any additional risk), and it may take 10+ years to show up.

It really boils down to how tolerant you are of tracking error, that is, how your investment deviates from your benchmark or market returns. Tilting to S/V will give you a portfolio that acts very differently than the market as a whole, and for a lot of folks it is too gut-wrenching to earn 10% while large growth is on a tear earning 20% per year.

RodC over at the diehards forum is quite the data guy, and he's put together a tracking error study comparing several tilting strategies versus TSM. It gives you a good idea of what to expect from a tilting strategy.
Bogleheads :: View topic - slice and dice tracking error study
innova is offline   Reply With Quote
Old 02-09-2008, 11:58 AM   #19
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,856
Quote:
Originally Posted by innova View Post
...a tracking error study comparing several tilting strategies versus TSM.
Tracking error is only an "error" if it reduces your returns.

Imagine if our "indexes" were equal-weighted or fundamentally-weighted instead of cap-weighted.

I remember a study several years ago claiming that the collective returns of the S&P 500, midcap 400, & smallcap 600 outweighed the TSM returns of the S&P1500. It'd be interesting to see a followup.
__________________
*

Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."

I don't spend much time here— please send a PM.
Nords is offline   Reply With Quote
Old 02-09-2008, 12:11 PM   #20
Recycles dryer sheets
 
Join Date: Jun 2007
Posts: 183
Quote:
Tracking error is only an "error" if it reduces your returns.
Well, not by the actual definition - but I do welcome positive error at any time!

I recall reading that same piece. I'll see if I can find it over at the diehards forums. One explanation that comes to mind is the rebalancing bonus (albeit small) that one would get by holding the parts of the TSM individually rather than the TSM as a whole.
innova is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Do you believe in the small cap value phenomenon? wildcat FIRE and Money 40 06-16-2007 11:16 PM
Need for International Small Cap ? mb FIRE and Money 11 06-15-2007 07:09 PM
New Small Cap Intl ETF Olav23 FIRE and Money 0 04-28-2007 06:31 PM
Micro, small & large cap stocks zandrajohn FIRECalc support 4 06-06-2006 07:43 PM
International Small Cap Fund Ideas? wildcat FIRE and Money 13 04-03-2005 07:12 PM

» Quick Links

 
All times are GMT -6. The time now is 10:36 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.