Comments on: Small-Cap and Value Stocks (Fama French 3-Factor Model) Low-Maintenance Investing with Index Funds and ETFs Sat, 10 Jan 2015 00:10:37 +0000 hourly 1 By: Michael Zhuang Fri, 17 Jun 2011 01:28:18 +0000 Small companies are perceived to be riskier than large companies; value companies (those not growing) are perceived to be more riskier than glamorous and growing companies, therefore they demand a higher risk premium.

Perception is reality. Efficient market purists don’t believe such thing as perception. Behaviorists think perception can be easily overcome. The fact is we see the world through our perception, the mental quirks that cause us to see certain things as more risky are extremely difficult to overcome.

Just my 2 cent.

By: Dylan Tue, 14 Jun 2011 01:08:13 +0000 I’m not a fan of value and small cap tilting. I see it as nothing more than more risk in pursuit of higher returns. And, I have yet to find any convincing arguments as to why overweighting (betting on) value stocks and small cap stocks should result in a better risk adjusted return. If such arguments, based in real economics, existed then why wouldn’t everyone tilt? Oh yeah, that’s not actually possible.

“Even if small-cap/value outperformance was an inefficiency and it has been eliminated, there’s no reason think that a portfolio tilted toward small-cap or value stocks would perform any worse in the future than a ‘total market’ portfolio.”

I can think of one. It costs more to tilt.

By: Barb Friedberg Tue, 14 Jun 2011 00:23:37 +0000 Mike, How could I pass up an article about some of my favorites? Personally, I go with the research and do a bit of tilting in this direction with etfs.

By: Mike Mon, 13 Jun 2011 20:54:56 +0000 My thoughts on US/international allocation can be found here. My own portfolio is approximately 50/50, but I think it’s entirely reasonable for many investors to use a larger domestic allocation–especially as retirement gets closer.

By: Brian Mon, 13 Jun 2011 20:50:06 +0000 And another question is what is the asset allocation you suggest for the 5/6 ETF model? Is it like 50% us, 50% international?

Thanks for helping me with all this– I’m oblivious!

By: Mike Mon, 13 Jun 2011 20:49:44 +0000 Simplicity sometimes means less diversification, but not always.

In the case of the Schwab US ETFs, for example, adding REITs or Small-Caps to the Broad Market ETF (which already includes them) doesn’t mean you’re any more diversified in terms of number or type of underlying stocks you own. It’s simply a change of the percentage allocation to each.

By: Brian Mon, 13 Jun 2011 20:44:16 +0000 Do you find that simplicity = less diversity or just makes it easier to track and manage?

I use to keep it simple but then read more about asset allocation and thought it’s better to diversify among more ETF’s. I kind of like keeping it simple though but didn’t want to risk losing out on more returns.

By: Mike Mon, 13 Jun 2011 20:31:09 +0000 Well, they’re both already included in the “Broad Market” ETF. If you wanted, you could hold a specific allocation to either one in order to overweight it, but it’s not 100% necessary in my opinion.

Interestingly, I overweight REITs in my own Vanguard portfolio. But even with that tilt, it’s only 4 funds. If I were at 5 funds without that tilt–as would be the case per the Schwab portfolio I just outlined–I’d probably just leave it at that. I’m a big fan of simplicity.

By: Brian Mon, 13 Jun 2011 20:27:01 +0000 So you would just avoid all the real estate, small cap for the US market?

By: Mike Mon, 13 Jun 2011 20:21:31 +0000 Brian: If it were me, I’d probably use all three of the international ETFs, as the “International Equity” ETF doesn’t include emerging markets or small-caps at all.

So it would look something like the following:
Schwab Intermediate-Term U.S. Treasury ETF (or short-term)
Schwab U.S. Broad Market ETF
Schwab International Equity ETF
Schwab International Small-Cap Equity ETF
Schwab Emerging Markets Equity ETF

..but that’s just what I would do. There are plenty of other reasonable possibilities.