Value vs Growth outlook & Portfolio

[mikes425]

I've worked with an occasional hourly FA since about '09. He has favored a value-oriented portfolio and my allocation has ranged from 35-44% equity to fixed income/bond. I'm 62 now, with accumulation of investable assets as of this month at about 2.25M.
I was questioning how much better off my return would have been in the 2009-2021 timeframe with a Growth vs Value orientation. Charles Schwab's port. performance figures suggest I have dramatically underperformed their benchmark(s) for a 40/60 "moderate conservative' PF.

I was corresponding with FA about whether I stand to ever 'make up' for the lag of the past dozen or so years wherein Growth trounced Value. He suggests if I stick with it, the Value may yet - (or would that be finally?) be rewarded - as opposed to making any major shift in strategy. He points out that the last time Growth had a run like this was the late ‘90s, and in the early 2000's Value did drastically outperform, and Growth stocks actually took the market down. Are we seeing a similar scenario to that unfolding now, i.e., large-cap index funds having become more “growthy” (as in 2000) with five big “tech” stocks alone comprising 25% of the S&P 500?

Arguably I was radically premature to have gone as defensive as I did post-2008-09, never returning to a higher than 45% equity percentage - and my accumulation could have - no, would have - been dramatically greater if I had. Hindsight is...well...you know.
But OTOH I have 'enough' at 62, modest spending/lifestyle and a relatively low COL. I've scaled back to basically working when I feel like it, as a sole proprietor, and will be good for about 18-19k/year in SS if I wait til age 66. Expenses are in the realm of 45k/year including 760/month COBRA health & taxes, own my home, have no debt, and dividend income is around 55k.

I think I'm ok to call myself safely retired and Firecalc seems to agree by all indications --tho I'm not confident that my PF composition aligns precisely with the definitions of asset types provided for the "Mixed Portfolio" amounts.

Lately my equity allocation has drifted up close to 45%. I tend to think regardless of Value or Growth orientation, the main driver is allocation but I'd be interested in others thoughts on the prospect for "Value" in the coming years, and/or whether I would be well served to stick with the moderate-conservative, somewhat defensive positioning, or moving closer to a balanced 50/50 allocation.

Thanks for any thoughts!

Mike

 

[RunningBum]

Don't chase past returns or try to make up for missing out in past years. Suppose your FA is correct and growth vs. value is cyclical. If you go with what did best the last X years you are selling low and buying high. You don't want that.

Decide what's best for the future and go with that.

For asset allocation, that's up to you and what you can sleep at night with. Not a lot of difference between 40/60, 45/55, and 50/50.

 

[Montecfo]

In what I call the FED era (2007-now), growth has been in vogue. Value has lagged generally.

I'm value oriented but since styles go in and out of favor I have owned growth also (and especially growth at a reasonable price).

I think you need a mix of stocks, not a single approach. But value may well outperforn if we get back into a real market.

But it pays to diversify by style in my opinion. And secular growth stories never seem to go completely out of favor.

 

[Brat]

I do sector ETFs so what I am suggesting is not what I do: Consider total stock market ETF (Vanguard's) + International Growth (Vanguard Mutual Fund). Alternately VUG (Vanguard's large growth or Fidelity's equiv mutual fund that does slightly better) + total stock market and the international growth mentioned above.

Chips are in high demand but who will have the fab and capacity to meet demand is above my pay grade so I use an ETF focused on that industry, it has done very well and I think is a long-term keeper. That kind of investing requires constant maintenance.

 

[donheff]

I adopted a "value tilt" many years back because I read all the various efficient frontier people, MPT people, Dimensional advisors, etc., say it is the ideal diversification. As the years passed by I could see that it was working against me in this environment. Not enough to be alarming but enough to catch my attention. I eventually decided to simplify by migrating toward total stock, total international, and total bond, slowly getting rid of the modest tilt funds. If I had stuck with my original AA I might eventually pull ahead a bit, or not. I just concluded that simpler would be close enough and easier for me to maintain or for DW and the kids to take over when I go south.

 

[OldShooter]

… Thanks for any thoughts!

Several:

1) Stop worrying about the past. This is al sunk cost and can have no effect going forward. Woulda,coulda, shoulda, is bad for your financial health. https://en.wikipedia.org/wiki/Sunk_cost Look only forwards in making decisions.

2) Why are you limiting yourself to US value and US growth? Sectors wax and wane in random fashion. If you are not familiar with the “quilt chart” go here: https://www.callan.com/periodic-table/
and spend some quality time. One good exercise is to cover all but the leftmost column of the chart with a piece of paper and mark down what you think will happen in the next column. Move the paper to display the column and see how how you did. Repeat that rightmost movement across the columns until you have convinced yourself that betting on sectors is probably futile.

3) @DonHeff brings up a couple of things. The foundation of Modern Portfolio Theory (MPT) in Harry Markowitz’s original (1953) paper is an assumption that prices in the market are random. (ref the quilt chart again). The other thing he’s seen is probably the Fama/French three factor model (https://en.wikipedia.org/wiki/Fama%E2%80%93French_three-factor_model), which highlights small stocks and value stocks as factors that improve performance. (Fama is on the Board at Dimensional Fund Advisors). This theory is about twenty years old and has been cussed and discussed heavily since then. It has also leD to “factor based” mutual funds promoted by hucksters to people who have heard of “factors.” Anyway, Fama argues that small and value factors are not due to mispricing and thus are “sticky” going forward. I have never even gotten a phone call from Sweden, much less a Nobel like Fama, but it seems to me that if everyone knows these are key factors, small and value stocks will be bid up until their advantage goes away. So I am not keen on them going forward and the performance of value stocks in the last decade might be causing Fama pause. I don’t know.

4) Previous posters are pointing you in the right direction. One total US market fund seasoned to taste with one total international fund. Or do as DW and I do, just buy the world via VTWAX/VT. Very relaxing.

5) Re your FA's advice ask yourself this: If he really knew how to beat the market and make serious money, would he still be hustling for clients? Of course not. The random behavior of prices makes any of these guys look good occasionally, thus keeping them in business. But do they know anything useful about the future? Does anyone? No.

 

[Out-to-Lunch]

I am going to modify DonHeff's post to make it IDENTICAL to what I would have written:

I adopted a "value tilt" many years back because I read all the various efficient frontier people, MPT people, Dimensional advisors, etc., say it is the ideal diversification. As the years passed by I could see that it was working against me in this environment. Not enough to be alarming but enough to catch my attention. I eventually decided to simplify by migrating toward total stock, total international, and total bond, slowly getting rid of the modest tilt funds. If I had stuck with my original AA I might eventually pull ahead a bit, or not. I just concluded that simpler would be close enough and easier for me to maintain or for DW [-]and the kids[/-] to take over when I go south.

There. Now it is my story! Thanks, Don!

 

[38Chevy454]

While you may have had a little better returns in growth funds vs value, the main reason your results lagged is that you were quite conservative with only 35-44% equities overall. But as previous replies stated, that is past and you can't go back. All you can do is decide on a path forward. I do think value will produce some decent returns in future, the question of course is when. Diversification is the key to help your portfolio, it will minimize the volatility. I think what you do need to do is evaluate your AA and decide what you want there, based on your risk tolerance and your timeframe for different phases of retirement.

 

[Montecfo]

Several:

1) Stop worrying about the past. This is al sunk cost and can have no effect going forward. Woulda,coulda, shoulda, is bad for your financial health. https://en.wikipedia.org/wiki/Sunk_cost Look only forwards in making decisions.

2) Why are you limiting yourself to US value and US growth? Sectors wax and wane in random fashion. If you are not familiar with the “quilt chart” go here: https://www.callan.com/periodic-table/
and spend some quality time. One good exercise is to cover all but the leftmost column of the chart with a piece of paper and mark down what you think will happen in the next column. Move the paper to display the column and see how how you did. Repeat that rightmost movement across the columns until you have convinced yourself that betting on sectors is probably futile.

3) @DonHeff brings up a couple of things. The foundation of Modern Portfolio Theory (MPT) in Harry Markowitz’s original (1953) paper is an assumption that prices in the market are random. (ref the quilt chart again). The other thing he’s seen is probably the Fama/French three factor model (https://en.wikipedia.org/wiki/Fama%E2%80%93French_three-factor_model), which highlights small stocks and value stocks as factors that improve performance. (Fama is on the Board at Dimensional Fund Advisors). This theory is about twenty years old and has been cussed and discussed heavily since then. It has also leD to “factor based” mutual funds promoted by hucksters to people who have heard of “factors.” Anyway, Fama argues that small and value factors are not due to mispricing and thus are “sticky” going forward. I have never even gotten a phone call from Sweden, much less a Nobel like Fama, but it seems to me that if everyone knows these are key factors, small and value stocks will be bid up until their advantage goes away. So I am not keen on them going forward and the performance of value stocks in the last decade might be causing Fama pause. I don’t know.

4) Previous posters are pointing you in the right direction. One total US market fund seasoned to taste with one total international fund. Or do as DW and I do, just buy the world via VTWAX/VT. Very relaxing.

5) Re your FA's advice ask yourself this: If he really knew how to beat the market and make serious money, would he still be hustling for clients? Of course not. The random behavior of prices makes any of these guys look good occasionally, thus keeping them in business. But do they know anything useful about the future? Does anyone? No.

Ok, to recap: "price movements are random"

Yet

Any advantage of value and small stocks will be defeated by purchasers bidding up their prices,

Which sounds decidedly...

Non-random.

 

[flintnational]

There is a great deal of academic research on portfolio construction. As Oldshooter mentions, some of it is by Nobel laureates. I would review this data, formulate a plan that meets your specific goals and risk tolerance. Then I would implement the plan and stick with it.

 

[OldShooter]

Ok, to recap: "price movements are random"

Yet

Any advantage of value and small stocks will be defeated by purchasers bidding up their prices,

Which sounds decidedly...

Non-random.

Oh there are all kinds of flaws vs purely random data. The biggest one is probably momentum. Data points are not independent as theory demands; Today's price is very slightly more likely to move in the same direction as yesterday's. The market approximates randomness.

There is actually a book by the guy who runs MIT's finance department, called "A Non-Random Walk Down Wall Street." It's on my shelf, but I didn't find it very interesting, other than to prove the uninteresting (to me) point that the market is not perfectly random. I don't know that he has made any money exploiting this non-randomness. Maybe.

The question is not: "Is the market purely random in a statistical sense?" The useful question is "Is it best for investors to assume that the market is random?" The answer to that is widely held to be "Yes."

A simple example: 100 yards of a flowing trout stream, all of the ripples, whorles, and eddies. The mathematics of that water flow is well understood, so the stream is not random at all. But our best approximation is to observe the apparent randomness and go from there because the measurements and mathematics are so complicated as to be hopeless. ref Chaos Theory.

 

[mikes425]

While you may have had a little better returns in growth funds vs value, the main reason your results lagged is that you were quite conservative with only 35-44% equities overall. But as previous replies stated, that is past and you can't go back. All you can do is decide on a path forward. I do think value will produce some decent returns in future, the question of course is when. Diversification is the key to help your portfolio, it will minimize the volatility. I think what you do need to do is evaluate your AA and decide what you want there, based on your risk tolerance and your timeframe for different phases of retirement.

Thanks for the valuable perspectives to all in this thread. Agreed, the AA is ultimately the driving factor and, with about 45% equity to fixed income/bonds, and that equity component has a reasonable diversification across US & International categories. I became more comfortable with greater risk in recent years but the allocation was not shifted to reflect that. My instinct is to keep equity exposure in the realm of 50% going forward. At 62 I don't consider it to be "too late" or risky to kick that ratio up to a more 'moderate' benchmark allocation to at least try to capture returns that are in line with index averages. That may be in the form of adding a broad based equity index etf/fund. The hard question to answer is, realistically what amount of I willing to accept, from this point forward in the way of loss of principal in a major correction. From that perspective, the way I'm positioned now is decidedly defensive and comfortable in that respect... but this for me is kind of the discussion I have to have relative to any changes I might make at this stage.

 

[OldShooter]

... The hard question to answer is, realistically what amount of I willing to accept, from this point forward in the way of loss of principal in a major correction. ...

Really, no one knows this until they've actually experienced at least a couple of correction. But a couple of things IMO are worth remembering: (1) Volatility is not risk except where it intersects with SORR, which can be prevented by a good AA. (2) In the entire history of corrections, major, minor, and flash, the market has never gone down and stayed permanently down. Recovery times vary but recovery has always happened.

I tell the students in my Adult-Ed investing class that Rip Van Winkle would have made a good long term investor.

 

[mikes425]

[/QUOTE=OldShooter;2560753]Really, no one knows this until they've actually experienced at least a couple of correction. But a couple of things IMO are worth remembering: (1) Volatility is not risk except where it intersects with SORR, which can be prevented by a good AA. (2) In the entire history of corrections, major, minor, and flash, the market has never gone down and stayed permanently down. Recovery times vary but recovery has always happened.
I tell the students in my Adult-Ed investing class that Rip Van Winkle would have made a good long term investor.[/QUOTE]

In defense - or at least acknowledgement - of the FA's opinion on making any major strategic adjustments at this juncture, aside from the current AA being inherently well positioned for volatility; I think he'd totally agree with you about what you tell your investment students. To that end, I sense he sees now as a time to stay put and stick with this portfolio as-is..at least in part because it just may be quite well positioned to do well insofar as the similarities to this market period and the early 2000s. As another poster pointed out, to make a change now would effectively be somewhat a form of timing - and maybe bad timing at that: ) RE: "Volatility is not risk except where it intersects with SORR" - that's a really great point!

 

[Montecfo]

Oh there are all kinds of flaws vs purely random data. The biggest one is probably momentum. Data points are not independent as theory demands; Today's price is very slightly more likely to move in the same direction as yesterday's. The market approximates randomness.

There is actually a book by the guy who runs MIT's finance department, called "A Non-Random Walk Down Wall Street." It's on my shelf, but I didn't find it very interesting, other than to prove the uninteresting (to me) point that the market is not perfectly random. I don't know that he has made any money exploiting this non-randomness. Maybe.

The question is not: "Is the market purely random in a statistical sense?" The useful question is "Is it best for investors to assume that the market is random?" The answer to that is widely held to be "Yes."

A simple example: 100 yards of a flowing trout stream, all of the ripples, whorles, and eddies. The mathematics of that water flow is well understood, so the stream is not random at all. But our best approximation is to observe the apparent randomness and go from there because the measurements and mathematics are so complicated as to be hopeless. ref Chaos Theory.

Well, it is just hard to follow your point when you make what appear to be contradictory statements in attempts to refute a single proposition.

Just sayin'.

 

[OldShooter]

Well, it is just hard to follow your point when you make what appear to be contradictory statements in attempts to refute a single proposition.

Just sayin'.

Got it. Sometimes I get a little more verbose and say something like "approximately random" but I don’t know if that really helps. To simply say "random" is arguably an oversimplification.

In my defense, I'll hide behind Markowitz who further simplifies by making his market not only approximately random but also approximately Gaussian. Which is a real stretch to me, but it does allow him to calculate standard deviations and claim that they mean something. I dunno. I guess it works for him. Taleb sputters and fumes about this in several of his books. Quite funny, actually.

 

[mikes425]

In defense - or at least acknowledgement - of the FA's opinion on making any major strategic adjustments at this juncture, aside from the current AA being inherently well positioned for volatility; I think he'd totally agree with you about what you tell your investment students. To that end, I sense he sees now as a time to stay put and stick with this portfolio as-is..at least in part because it just may be quite well positioned to do well insofar as the similarities to this market period and the early 2000s. As another poster pointed out, to make a change now would effectively be somewhat a form of timing - and maybe bad timing at that: ) RE: "Volatility is not risk except where it intersects with SORR" - that's a really great point!

 

[38Chevy454]

Mikes425, remember as Oldshooter said, that any downturn will be for fairly short period in respect to your retirement. As a possible way to think of how to be prepared for a potential downturn, think of the bucket type strategy:
1. Short term 1-2 years with mostly cash or near cash type conservative investments. This might be 20% max equities for purposes of discussion.

2. Mid-term, where you get more aggressive and this is your 2-5 years money. Something like 50-60% equities is a reasonable target here.


3. Long term, past 5 years. This is almost all equities to help with inflation and also promote highest growth of the account balance.


If it helps, you can break into separate accounts even. Then adjust the investments in each bucket, with periodic transferring money from longer to shorter to maintain your buckets. The bucket 1 will likely last through all but the worst of corrections, and even if it needs to take money from bucket 2, you still have that 40-50% of fixed income allocation there to avoid selling equities if the market is still down.


I don't have percentages of your investments that are in each bucket, but let's just be generous per your numbers of $60K/year budget. I would put $120K in bucket 1, $180K in bucket 2, and balance in bucket 3. Whatever that results in your AA is what it is. If that seems high in equities to you, and volatility of bucket 2 and especially bucket 3 makes it worry you, then just adjust the AA in buckets 2 and 3 to be more conservative than my suggestions.

 

[OldShooter]

... as Oldshooter said, that any downturn will be for fairly short period in respect to your retirement. ...

Well, er ..., thanks for quoting me but I try to never make forecasts like "any downturn will be." What I said was "recovery has always happened." Inductive reasoning would lead us to forecast similar behavior based on this history, of course.

We live our lives by inductive reasoning, but I always try to remember Taleb's turkey: https://www.businessinsider.com/nassim-talebs-black-swan-thanksgiving-turkey-2014-11

 

[Winemaker]

My portfolio is 65% euity right now, and divided amongst Vanguard Small Cap, Med Cap Index, International, Value, Growth and S&P500, all institutional funds in my 401k. I'm up $600,000 since Oct 2014, and I'm not changing my methodology, style, or way of thinking. Ya dance with the girl that brought ya.

 

[jurgs01]

I buy what is out of favor. I bought some growth stocks during COVID, but mostly energy and value. Right now, I am finding relatively few bargains in value, a few bargains internationally, and I am short tech with both shorts and puts.

I have a few dollar cost average plays on international and precious metals/miners. I consider those my "I don't trust the US Government" plays that I will never look at returns on and will continue to put money in as long as I am working.

 

[CSdot]

I've worked with an occasional hourly FA since about '09. He has favored a value-oriented portfolio and my allocation has ranged from 35-44% equity to fixed income/bond. I'm 62 now, with accumulation of investable assets as of this month at about 2.25M.

I think it is pretty impressive that you have built $2.25M utilizing a 35-44% equity to fixed income/bond mix. Not sure what the big difference is between value and growth. I imagine value means dividend producing stocks, while Growth means FANG and other high fliers?

If you are unhappy with $2.25M, I would be more inclined to think that has more to do with the 56-65% fixed income/bond allocation than what type of equities you chose for the 35-44% equities portion.

Using the premise that the growth of the account over time was not what you expected, have you ever evaluated how much of the $2.25M you contributed vs. how much of today's $2.25M came from growth of the account (the amount you or your employer did not contribute)?

I went through that exact exercise recently on my 401(k), and over the 23 years my portfolio balance today consists of 20% personal contributions, 10% employer match, and 70% growth. I expect to see that growth number grow and grow more impressive over time. As they say, compound interest is truly the 8th wonder of the world.