Author Topic: Supplementing VTSAX with small-cap index (VSIAX or VSMAX)  (Read 3002 times)

grandep

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Supplementing VTSAX with small-cap index (VSIAX or VSMAX)
« on: May 03, 2018, 08:41:03 AM »
Hi all,

I'm curious if anyone supplements their VTSAX holdings with small amounts of VSMAX (Small Cap Index) or VSIAX (Small Cap Value Index). I know many folks like sticking with just VTSAX for the simplicity, but if I am willing to add a little complexity it seems that adding a higher proportion of small cap stocks to the total market index could boost annualized returns a bit. Has anyone tried this with any success?

Jrr85

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Re: Supplementing VTSAX with small-cap index (VSIAX or VSMAX)
« Reply #1 on: May 03, 2018, 08:52:21 AM »
Hi all,

I'm curious if anyone supplements their VTSAX holdings with small amounts of VSMAX (Small Cap Index) or VSIAX (Small Cap Value Index). I know many folks like sticking with just VTSAX for the simplicity, but if I am willing to add a little complexity it seems that adding a higher proportion of small cap stocks to the total market index could boost annualized returns a bit. Has anyone tried this with any success?

For our Roth's, I put everything into VTSAX.  For our 401ks, I put "enough" into VTSAX or equivalents, and then in one of them I put some into a Russell 2000 based index fund, and in another I actually put it into an actively managed small cap fund.  I get a break on the management fee though b/c of my wife's employment and it has outperformed for a long time (although that has changed in the past few years, so they may have finally run out of luck or gotten too much money to continue to outperform). 

Haven't been doing the Russell 2000 long enough to provide any insight onto impact on returns (not that it would be meaningful going forward anyway). 

Scandium

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Re: Supplementing VTSAX with small-cap index (VSIAX or VSMAX)
« Reply #2 on: May 03, 2018, 09:02:23 AM »
Hi all,

I'm curious if anyone supplements their VTSAX holdings with small amounts of VSMAX (Small Cap Index) or VSIAX (Small Cap Value Index). I know many folks like sticking with just VTSAX for the simplicity, but if I am willing to add a little complexity it seems that adding a higher proportion of small cap stocks to the total market index could boost annualized returns a bit.
That's some strong conviction.. Why do you say it seems like that? And if it does why wouldn't everyone do it? How sure are you? Yeah maybe it would. Personally I don't think so and don't bother.

Has anyone tried this with any success?

Some people do. They can let you know in 30 years whether it worked out or not, then you can go back and invest like that in 2018... oh wait..

grandep

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Re: Supplementing VTSAX with small-cap index (VSIAX or VSMAX)
« Reply #3 on: May 03, 2018, 09:16:28 AM »
Hi all,

I'm curious if anyone supplements their VTSAX holdings with small amounts of VSMAX (Small Cap Index) or VSIAX (Small Cap Value Index). I know many folks like sticking with just VTSAX for the simplicity, but if I am willing to add a little complexity it seems that adding a higher proportion of small cap stocks to the total market index could boost annualized returns a bit.
That's some strong conviction.. Why do you say it seems like that? And if it does why wouldn't everyone do it? How sure are you? Yeah maybe it would. Personally I don't think so and don't bother.

Has anyone tried this with any success?

Some people do. They can let you know in 30 years whether it worked out or not, then you can go back and invest like that in 2018... oh wait..

I used the word "seem" to avoid sounding like I had more authority or confidence than I do. I am not an expert or veteran by any means. My investing expertise extends to the few books I've read and the occasional article, but I have read that small cap stocks tend to have higher returns at the expense of more risk. Since I'm looking at a long time horizon (20-30+ years), the risk is less of a concern so the extra returns seem worth it.

Value funds tend to do especially well as typified by people like Ben Graham, Warren Buffet, and Joel Greenblatt. I also found this table (attachment), which is what inspired this topic in the first place. My purpose in posting here is to have others stress test my idea. If it's a bad idea I'd like to know why, but from the information I currently have it doesn't seem like a bad idea.

Why doesn't everyone do it? Who knows. People do dumb things. This forum preaches the gospel of index funds (which I agree with) and yet most people don't use those either.

Scandium

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Re: Supplementing VTSAX with small-cap index (VSIAX or VSMAX)
« Reply #4 on: May 03, 2018, 09:22:51 AM »
Hi all,

I'm curious if anyone supplements their VTSAX holdings with small amounts of VSMAX (Small Cap Index) or VSIAX (Small Cap Value Index). I know many folks like sticking with just VTSAX for the simplicity, but if I am willing to add a little complexity it seems that adding a higher proportion of small cap stocks to the total market index could boost annualized returns a bit.
That's some strong conviction.. Why do you say it seems like that? And if it does why wouldn't everyone do it? How sure are you? Yeah maybe it would. Personally I don't think so and don't bother.

Has anyone tried this with any success?

Some people do. They can let you know in 30 years whether it worked out or not, then you can go back and invest like that in 2018... oh wait..

I used the word "seem" to avoid sounding like I had more authority or confidence than I do. I am not an expert or veteran by any means. My investing expertise extends to the few books I've read and the occasional article, but I have read that small cap stocks tend to have higher returns at the expense of more risk. Since I'm looking at a long time horizon (20-30+ years), the risk is less of a concern so the extra returns seem worth it.

Value funds tend to do especially well as typified by people like Ben Graham, Warren Buffet, and Joel Greenblatt. I also found this table (attachment), which is what inspired this topic in the first place. My purpose in posting here is to have others stress test my idea. If it's a bad idea I'd like to know why, but from the information I currently have it doesn't seem like a bad idea.

Why doesn't everyone do it? Who knows. People do dumb things. This forum preaches the gospel of index funds (which I agree with) and yet most people don't use those either.

If you check out the bogleheads forum for small-cap value this has been discussed endlessly, and probably still is. Some swear by it, others are skeptical. I came away not convinced but maybe you'll see it differently.

I won't rehash all the arguments but mainly;
- It was the case in past, but will it continue now that it's been "discovered"?
- there was no way to buy small cap and/or value stocks in the past. Now there's a new ETF every week. Even an S&P500 fund is relatively new, and that was the only index until recently.

grandep

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Re: Supplementing VTSAX with small-cap index (VSIAX or VSMAX)
« Reply #5 on: May 03, 2018, 09:35:02 AM »
If you check out the bogleheads forum for small-cap value this has been discussed endlessly, and probably still is. Some swear by it, others are skeptical. I came away not convinced but maybe you'll see it differently.

I won't rehash all the arguments but mainly;
- It was the case in past, but will it continue now that it's been "discovered"?
- there was no way to buy small cap and/or value stocks in the past. Now there's a new ETF every week. Even an S&P500 fund is relatively new, and that was the only index until recently.

Cool, I'll poke around on the Bogleheads forums. Thanks for the reference.

neil

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Re: Supplementing VTSAX with small-cap index (VSIAX or VSMAX)
« Reply #6 on: May 03, 2018, 02:48:12 PM »
Invoking famous value investors and comparing that to an index fund labeled "value" is not the same thing.  A typical active value investor would be looking for opportunities where they can get a deal, and an index fund is following some kind of algorithm or definition.

https://personal.vanguard.com/us/FundsStrategyAndPolicy?FundId=5860&FundIntExt=INT&funds_disable_redirect=true
"The fund employs an indexing investment approach designed to track the performance of the the CRSP US Small Cap Value Index"
"The fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued"

http://www.crsp.com/products/investment-products/crsp-us-small-cap-value-index
"CRSP classifies value securities using the following factors: book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio."

Where:
- Most companies are valued on cash flow and book value is heavily influenced by GAAP rules
- Forward earnings is a guess
- Historic earnings are not a guarantee of future earnings
- Dividend doesn't even belong in a value estimate (though, that's more my opinion)
- P/S is heavily dependent on business model

I don't really have a strong opinion, but it looks suspiciously like an algorithm determined by humans.

I do know that investing focus in small/mid increases drawdown.  I learned that well in 2009.  I left my portfolio alone at the time, but as I get closer to "winning the game" I appreciate the value of simplifying and now it's at a normal balance.