Total Stock Index v. Large/Small/Value/Growth routine

[CCdaCE]

Originally Posted by Rich_in_Tampa

Is there any good evidence to show that the usual large value/large growth/small value/small growth slice and dice rebalancing routine really outperforms a Total Stock index fund over the long haul?

Wondering if it's worth the hassle. My searches have turned up lots of advice but little data. I do understand that small and value have outperformed the market for a while, but now they say growth will surge, etc. etc. It's beginning to feel that just owning the whole market for a long time is as good a way to go as any.

(this assumes you have your fixed income, cash, and international already in place - just talking about the stock piece)

I assume you're aware of one of the Diehards' Madsinger's Monthly Report. It's a collection of portfolios from Coffeehouse to different slice-n-dice allocations, etc.

It's a limited data set, but "through a market cycle" and all that...

If I had the cash, I'd slice-n-dice, but, I'm a tinkerer. I avoid the low balance fees by having only Total Stock Market Index right now. My next step is to add Total International shortly. Personally, it burns me that I didn't add Int'l. previously. I would've made up much more than the $10-20 in fees. Maybe I'd be bitter if I'd added Int'l. and it hadn't done so well. Still learning.

I guess if you wanna screw around rebalancing, taking on more risk (supposedly) for the "expected return" of 1-2% more, go for it. ...that's how I see it, in a nutshell. Just having the TSM, Total Int'l, Total Bond mix will probably give you 90% of the return of slicing-n-dicing. You probably already knew this, but I like to beat a dead horse try to explain it more, since you asked about data.

Edit: added more comments besides the link.

-CC

[clifp]

Back in 1999 and 2000, I think it was pretty obvious that Value stock were underpriced relative to Growth stocks. Is this still true, with value stocks like ExxonMobile, CitiGroup and BofA being among the top stocks. I am not so share.

So unless you have a strong conviction that Value and Small cap were still undervalued I'd be incline to go for the Total Market, for two reason first simplicity and second expenses.

Even using Vanguard 's very inexpensive index funds, the expense ratio of the VTSAX (Admiral total stock market index) is only .09% that compares to a typical ER of .23% for the slice and dice approach for the non-admiral shares. On a 1 Million portfolio that difference adds up to $1,400 which is getting into the real money area.

[lswswein]

Originally Posted by clifp

Back in 1999 and 2000, I think it was pretty obvious that Value stock were underpriced relative to Growth stocks. Is this still true, with value stocks like ExxonMobile, CitiGroup and BofA being among the top stocks. I am not so share.

Tactical asset allocation is very difficult to implement and is very close to market timing asset classes; Might be easier to just come up with a portfolio and rebalance. Though I am a tinkerer, I force myself from changing my asset allocation / rebalancing more than once in one years.

-h

[audreyh1]

Originally Posted by runchman

If keeping it simple tends to keep your hands off it, probably a good idea.

Exactly!

Another good reason for keeping your hands off is - then you can live your life instead of thinking about investments!

Audrey

[Rich_in_Tampa]

OK, I'm convinced. Total Stock Market is good enough for me. May miss out on a small/value premium, but then again, may not. And in any case it's "set it and forget it."

[saluki9]

Originally Posted by audreyh1

Exactly!

Another good reason for keeping your hands off is - then you can live your life instead of thinking about investments!

Audrey

What fun would that be?

[audreyh1]

nm

[CCdaCE]

Originally Posted by Rich_in_Tampa

OK, I'm convinced. Total Stock Market is good enough for me. May miss out on a small/value premium, but then again, may not. And in any case it's "set it and forget it."

And the amount you "may miss out on" is seemingly relatively small. IMO, anyway.

But, on one had we're haggling about 0.2% expense ratios, and on the other hand throwing "expected" additional return of 1%+ (?) out the window.

Lots of stuff to wrap your mind around. I think it mattered more, to slice and dice, when correlations were lower. Now, if you compare Total Stock Market to Total International, for instance... they seem to be up and down in tandem (closely correlated) lately.

Over time correlations change.

Arg, I keep explaining things, and you want DATA!. I'll shut up now.

-CC

Edit: See? You already knew this.

[Rich_in_Tampa]

Originally Posted by CCdaCE

Arg, I keep explaining things, and you want DATA!. I'll shut up now.

-CC

Edit: See? You already knew this.

I can't believe that was my post. It sounded so smart at the time (heck, even WAB begrudgingly acknowledged my point ), and now I don't understand a thing I said .

[rmark]

Robert Arnott had a article in Financial Analysts Journal within the last few years, showing that small stocks higher return was due more to poorly run large companies recovering, than on company size per se. Illia Dichev has a paper showing small stock investors come late to a bull market, missing most of the early price rise, resulting in lower realized returns than market history indicates.

[ats5g]

Rich,

You may appreciate this speech by John Bogle on slicing and dicing:

The Telltale Chart

Here's DFA's graph of the TSM being tilted towards LG, from their US Equities page:



- Alec

[Hydroman]

For me it is less a debate over whether S&D or TSM have the highest long term return and more of a debate over which approach best meets an ER need for low volatility while still achieving an adequate return to cover inflation adjusted withdrawal needs through end of life.

[samclem]

ats5g,
Thanks for the link to the Bogle presentation--his case for TSM rather than slice/dice is okay, though he has to throw out a lot of actual data to do it (basically, TSM performs just as well or better than a smal/value-tilted portfolio, if you throw out the years when value/small did better . . . hmmm) .

Still, I'm not hard-over on the value/small thing. My holdings in small and value are through Vanguard funds, which are a lot less tilted toward hard-core value stocks than are DFA funds. Costs are low, and I figure we're avoiding exposure to the stocks that have been bid up to stratospheric levels. And we have some $$ in TSM, so there's some balance there.

[Rich_in_Tampa]

Originally Posted by samclem

Thanks for the link to the Bogle presentation--his case for TSM rather than slice/dice is okay, though he has to throw out a lot of actual data to do it (basically, TSM performs just as well or better than a smal/value-tilted portfolio, if you throw out the years when value/small did better . . . hmmm) .

Took a slightly different message from that link, Sam. I think he was saying that the bulk of the apparent difference has to do more with an early run (for the market cap piece) of 18 years skewing the total compounded advantage disproportionately, as well as zig-zagging in the value piece creating a too-loud "signal to noise" ratio for valid conclusions about the value "premium."

I'm way over my head in figuring all this out, but it is reassuring to know that there are at least some in a position to know who acknowledge a vaild place for just sticking with TSM. Always the great compromiser, I have TSM but threw in 10% small market idx for good measure . As it is with me with TIPs, my goal is just to have a year or two coverage in case either of those two allocations surge or the rest tank - not as a core investment.