What is the highest Small Cap % You'd Go?

[heybro]

What is the highest Small Cap % You'd Go?

[Le Barbu]

Depends a lot of your situation. Age, family (wife, child etc), job security and pension plan. How did you react with your investment in 2008 ?

Ex. 1- You're 30, save +/-50% of income, no child, safe job, went thru 2008 without selling (stock), I would rock on 100% VBR (small cap value) for the next 10 years at leat then review my A.A.

Ex. 2- You're 40+, +/- safe job, no pension plan, new to investing (less than 5 years) so 2008 did't hurt your savings...then I would bet on 50-60% VTI, 20-30%VXUS and 20-30%BND.

Hope this help !

[GGNoob]

Highest I would consider is 100%, but I don't think I would actually ever do that because I'm not sure I'd be able to take the volatility of 100% small cap. Historically, from 1927 to 2005, small cap value has averaged 12.13% (source).

The only account that we have a dedicated small cap index fund in is my wife's 401k. It is 27% of the portfolio. So with my preferred asset allocation in mind, that's the highest I would actually go.

[Dodge]

Yes, this particular subset of the total stock market has done well over the years, but now that this information is public, I expect the advantage to disappear.  I'm a proponent of keeping things simple, so I'm sticking with plain VTSAX for my domestic stock allocation.

[foobar]

Yes, this particular subset of the total stock market has done well over the years, but now that this information is public, I expect the advantage to disappear.  I'm a proponent of keeping things simple, so I'm sticking with plain VTSAX for my domestic stock allocation.

This info has been public since the early 80s (at least). So far it hasn't changed much. TSM is about 10% small caps (and another 20% or so in midcaps). That should be your lower bounds. Studies have suggest that adding up to about 30% lowers risk and ups returns (adding more ups risk and return) so that would be my minimum and would consider going up to 50% or so.

[Dodge]

Vanguard's small cap value fund has only been around since 2011. Is there an index fund that has been sound since the 80's I can look at?

[hodedofome]

There's a lot of things that have been "well known" for decades yet they still do well over time (like value and momentum). IMO the reason for this is because either the volatility is high enough to keep people from jumping in too much, or the periods of underperformance are frequent enough or drastic enough to shake out the fair weather fans.

The big funds generally can't touch small caps so I expect the market to remain somewhat inefficient at times. That being said, small caps have outperformed the S&P 500 by 4.2% since 2000...mean reversion is gonna happen at some point...

[NP]

If small cap stocks have done better because of market inefficiencies, that effect is going to fade, if it hasn't already, as this information becomes more widely known. However, small cap stocks could also have done better simply because they're riskier and in an efficient market you tend to get a premium for accepting extra risk.

I see no reason to believe that there were any inefficiencies in the market, and I'm not enough of an expert to comment on such a controversial topic. But the risk trade-off seems to be real. Therefore, and because small cap stocks can also act as a mildly efficient (vs. large cap stocks) diversifier, I think it's a good idea to include a big chunk of them if one has a long time horizon. With likely 15+ years till retirement, I'd go as high as 60% of small and mid cap combined.

Here's a relevant study: http://www.morningstar.com/products/pdf/MGI_StockResearch.pdf

[foobar]

If small cap stocks have done better because of market inefficiencies, that effect is going to fade, if it hasn't already, as this information becomes more widely known. However, small cap stocks could also have done better simply because they're riskier and in an efficient market you tend to get a premium for accepting extra risk.

I see no reason to believe that there were any inefficiencies in the market, and I'm not enough of an expert to comment on such a controversial topic. But the risk trade-off seems to be real. Therefore, and because small cap stocks can also act as a mildly efficient (vs. large cap stocks) diversifier, I think it's a good idea to include a big chunk of them if one has a long time horizon. With likely 15+ years till retirement, I'd go as high as 60% of small and mid cap combined.

Here's a relevant study: http://www.morningstar.com/products/pdf/MGI_StockResearch.pdf

Please note that study is cherry picking dates to some extent. 1975-1980 were really good years for small caps. By both starting and ending during a bull market for small caps, you overstate the benefits. Run the numbers from  1975-1999 (start of small cap run to end of large cape one) and you still see a gain but it is on the order of 1% not 2%.

I was bullish on small/mid caps for a bit over 15 years now. After all all the papers and books said you would get higher returns. And so far that has been true.  However it should be noted that after long periods of outperformance, you often end up with periods of under performance.  Buying last decades hot investment rarely works out well.

[NP]

Please note that study is cherry picking dates to some extent. 1975-1980 were really good years for small caps. By both starting and ending during a bull market for small caps, you overstate the benefits. Run the numbers from  1975-1999 (start of small cap run to end of large cape one) and you still see a gain but it is on the order of 1% not 2%.

I was bullish on small/mid caps for a bit over 15 years now. After all all the papers and books said you would get higher returns. And so far that has been true.  However it should be noted that after long periods of outperformance, you often end up with periods of under performance.  Buying last decades hot investment rarely works out well.

You're totally right and thank you for explaining this. I didn't attribute much significance to the 2% number (hence forgot to point out that you shouldn't count on it) because it seemed obvious that such predictions cannot be made, and the gain may easily be lower in the future, or even negative for a while. I think an expected 1% gain over the long term is still impressive but I wouldn't even bet on that. I'm simply saying two things: One, in my opinion there's a good theoretical reason for some unknown degree of gain because of the increased risk. Two, small and mid cap stocks are a little bit (but not much!) of a diversifier versus large cap stocks. The latter means that on the one hand it makes sense to include them in an asset allocation policy and on the other hand the risk of increasing their relative weight is limited.

[ephillipsme]

This all depends on your particular situation, time line, risk tollerance and many other factors.  Personally being 45 and stable jobs and biggest financial item on the horizon is kids college cost starting in a couple.  So retirement accounts - long term ~ 25%, savings for college - short term less then 5% at this point.

[wtjbatman]

50%.