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Small cap and value premium not worth it?

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  • Small cap and value premium not worth it?

    It seems WCI, Paul Merriman and several others in the financial community believe there is a slight long term benefit to small cap and value premiums and a slight tilt to your portfolio. I know WCI, like several other people, recommend only tilting a minor portion in the portfolio (as much as you believe the premium). Just starting out investing and only do 10% of total portolio to Vanguards's SCV fund. Rest is total markets (VTSAX, VBTLX, VTIAX) and small slice of REIT.

     

    Just came across this article with heavy math.

    https://earlyretirementnow.com/2019/06/12/my-thoughts-on-small-cap-and-value-stocks/

    Seems to suggest the premium is overblown. I'd be curious the thoughts of this forum as there are likely smarter people than I.

     

  • #2
    I mean, Fama did win a Nobel prize....
    3 things:
    1- how small and how value
    2- how long to hold
    3- how much extra will you pay

    Personally I don't do it because of those reasons.

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    • #3
      4- Fat tails

      “ that distributions of stock returns are fat-tailed: there are far more outliers than would be expected from normal distributions – a fact reconfirmed in subsequent market episodes,”

      Virtually every academic Nobel laureate cites empirical evidence and readily admits that predictive value is a completely different hypothesis.

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      • #4
        I am listening to that ChooseFI podcast right now.  I remember when I started educating myself on investing and personal finance about 7 years ago I cam across Paul Merriman's website and listened to his podcast.  In the end I just thought it was too complex for me at the time to do that much slice and dice.  I went with a lazy 3 fund portfolio and have not regretted it.  Now I would be more than capable of doing a slice and dice portfolio, but just do not think the premium is worth the extra work, cost, and risk.  I enjoyed Big Ern's breakdown of the overstated premium.  In my experience I still believe that during a working Docs career it will be far more lucrative to actively focus on savings rate rather than complex investment strategy.  So be active in your savings and passive in your investing, including time dedicated to each.

         

         

         

         

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        • #5
          Does it even really matter? Investor behavior and discipline have far more impact on investor outcomes than slight tilts in market cap or style in a well-diversified portfolio.

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          • #6
            Relevant Boglehead's thread on this: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=283234&newpost=4590428

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            • #7
              If there’s a premium you have to commit to holding value for a long time. For instance, look at more recent value significant under performance. I’m not convinced I’m that disciplined. So I stick with total index
              my radiology group is hiring, pm if you can do msk and are interested

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              • #8
                There are lots of reasons why these may or may not be great. I doubt the value premium is dead, many still think its there its just not a simple PE, EV/EBITDA screen that any yokel can google. The market is more efficient than in the past and information less hidden, so everyone can see a cheap company. Cheap companies today are more deserving than in the past maybe, who knows.

                Idk if its in your linked article but others have deconstructed the small cap premia and a lot of it comes from misclassification and a couple one time bumps from moving into indexes and such moves that are not real.

                I think everything is just harder and more nuanced these days. No simple superficial method is going to return outsized gains without getting smashed with money and arbed away.

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                • #9




                  If there’s a premium you have to commit to holding value for a long time. For instance, look at more recent value significant under performance. I’m not convinced I’m that disciplined. So I stick with total index
                  Click to expand...


                  This is the most important part. Some of the "bad times" are longer than manys investing horizon. I know I dont have that kind of patience.

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                  • #10
                    First, maybe it's real and maybe it isn't. I think it probably is.

                    Second, even if it is real, there will be long periods of time (like the last ten years) when it doesn't show up. It will be difficult to stay the course with that sort of tracking error.
                    Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                    • #11
                      Small and value have not done well for the last 10 years. This improves the odds that they are not overpriced. The existence of this doubt thread helps to preserve the effect.

                      Unless, it's already been destroyed by ease of access to small and value funds...

                      Could be either case.

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                      • #12
                        If it’s real but hasn’t outperformed in the past 10 years, it’s due for huge outperformance. If it’s not real, and the past decade is partial proof, it won’t do any better and could do worse. Talking heads can’t agree.

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                        • #13
                          Small value has always been 10% of my portfolio. Should I continue the “discipline” and stay the course or should I finally just see the light and just sell and move it into total after 19 years? I have no idea if if I’m doing Better or worse with extra work. I’m inclined to do the latter.

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                          • #14




                            Small value has always been 10% of my portfolio. Should I continue the “discipline” and stay the course or should I finally just see the light and just sell and move it into total after 19 years? I have no idea if if I’m doing Better or worse with extra work. I’m inclined to do the latter.
                            Click to expand...


                            If it's just 10% of your portfolio I don't think it's going to move the needle all that much either way.

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                            • #15
                              1. If everyone is telling you how terrible investment something is it is probably a good idea to avoid it.

                              2. If everyone is telling you how great an investment something is it is definitely a good idea to avoid it.

                               

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