Bogleheads University 501 2023 - The Case for Factor Investing with Paul Merriman

[Applause] [Music] you're going to get Paul maramman because Paul marman is here and I'm excited about that he's a nationally recognized Authority on mutual funds index investing and asset allocation he retired in 2012 from marman wealth management which he founded in 1983 and basically dedicated himself at that point to just educating as many people as he possibly could for free um about financial literacy he's the author of eight books he writes a regular column for market watch and produces a multi-award-winning weekly podcast sound investing and uh he's got over 30,000 subscribers to his twice monthly newsletter uh more recently he has made a massive donation to uh boosting financial literacy at a university in EST state so thank you for that Paul and congratulations on on that uh I really am excited to be here this this is on my bucket list some people want want to go to other parts of the world when they retire I've been waiting to be here for 10 years so I am I yeah it's really it's it's it's very exciting and and I am not here really to debate Rick Ferry I really am here to share some information that I think could help you make more money with your portfolios nothing more than that we are simply a nonprofit organization feeding people information that we hope will help them understand ways to combine different kinds of equity asset classes we are not investment advisors we are not financial planners we are teachers and that is all we are so as your teacher for a few minutes here today I want to make the case for small cap value as a factor in your portfolio and I want to make it based on information that I trust and I mention that because I ran into a gentleman last night a a friend from many many years ago he doesn't believe in small cat value it was not Rick and I wanted to know why because there's so much great information he doesn't trust the path the the returns or the studies that have been done and we are in a faith-based industry hisory like it or not and since that's the way it is if he doesn't trust those numbers then I understand that he shouldn't be using small capat value I use numbers that I'll share with you many more than many people like that make me trust it that come from people that I trust have developed the numbers from the past that I can recommend in a sense to other people so let me talk about the truth of of of of small cap value The Good the Bad and the Ugly and let me tell you the ugly is about as ugly as it can get and if a person's not ready for that ugliness then they shouldn't be in it and by the way that can be true of the stock market as well it all starts with this simple table that shows the long-term uh return for the four major US Equity asset classes I started making this table in 1995 and every year we updated and what it shows is that large cap Blend or the S&P 500 is compounded at about 99.8% large cap value higher small cap blend higher small cap value at at 13.2 now what's fascinating to me is a lot of people don't trust that 13.2 because if you trusted it wouldn't you want to have some of it if it didn't take your risk over the top which of course is the big question so if we could believe that short-term bonds make less than intermediate bonds or long-term bonds or governments make less than corporate or junk bonds make more than high grade I mean if we could believe all of those things why is this such a big leap of faith so I'm going with what I'm seeing here and I want some of that 13.2 I want it for my portfolio and I've got a brand new granddaughter we gave her money last November when she was born half in S&P 500 half in small cap value for the rest of her life and if you want to know why half in S&P 500 I don't have time this is one of the greatest teaching tools I've ever seen Daryl balls is our director of of of analytics uh total volunteer as as is Chris Patterson who also works with me on this project what this shows is the rate of return I know it's too small many of you don't have your computers but let me just tell you what it shows one year at a time since 1928 how did the S&P 500 do how did small cap value do how did large cap value do H H how did uh uh all of the major asset classes do and he colorcoded them for us so when you get home and you and you pull up the PDF on this you can look at these and you're going to be able to look at at 90 plus years of returns and see how wild and crazy it is I mean there's nothing low risk about the S&P 500 it's at the top it's at the bottom I mean it's it's all over the place so is small cap value and so one of the things this does because the green is the S&P 500 by the way the green is supposed to give us the lowest rate of return why because it's the highest quality of the four but Daryl surprised me he's always got a surprise in a new table he threw in the four fund strategy what would happen if you put those four asset classes including the S the small cap value if you put them together in one portfolio and you rebalanced them every year how much more risky would that be than the S&P 500 that is the pink and where is the pink the pink is in the middle why is it in the middle because it picks up some of the value of all four but it's never the best and it's never the worst so if you had a portfolio that was 25% small cap value that's a lot and 75% these other three assets and you were running around the middle all the time if the rate of return was better than the S&P 500 would it not be a better investment anybody vote for yes not enough so then a couple years later he does another table but this time and I'm just giving you the results so you'll see why I think this is so powerful here what we have at the top we have us small cap value 13.4% over that whole period of time at the bottom we have the S&P 500 I want you to notice something here those two are normally at the top or at the bottom because the other three are combinations of these major asset classes what I love is the S&P 500 is 10.2 the two- fund strategy that my granddaughter is going to to retire on is 12.2 every half a percent would mean at least a couple million more dollars to her that difference and so I think that's a slam dunk because that too there's it it doesn't end up at the top it doesn't end up at the bottom the two fund strategy that's what we're looking for Less volatility better returns I called that Ben Felix I think one of the finest Educators could we agree on that Ben Felix is the finest one of the finest Educators I'm talking about YouTube pieces on investing how many follow Ben out of curiosity yes and I just think he does a mar marous job I called Ben I said Ben I've got to face Rick give me something I could bring here that that Rick isn't prepared for and he gave me something that's just marvelous he gave me a study he was working on that showed remember the Lost decade from 2000 to 2009 that was a big surprise that kind of stuff doesn't happen very often he went back to 1927 he looked at every hund uh 120 uh month consecutively to to call those all decades he found out that there were 145 lost decades for the S&P 500 over that period of time so lost decades are not uncommon and by the way there's a lot of repeats there because you're going one month at a time to start a new period of time but here's what I like even if small cap value does not make you a lot richer we do at least know this that Looking Backward if we looked at the 45 lost decades for the S&P 500 how did small cap value do for those same periods and it turns out in 78 74% 108 of the 145 small cap value made money and that if you looked at every one of those 145 decades that the SMP 500 on average lost 2.3 small cap value made 6 45 and I'm thinking I mean I can't tell you that every little number that was ever added up in all of these studies is exactly right I'm a salesperson we don't we don't focus on details right the bottom line is this tells me there is something there worth oh and I love this we have over 200 tables that kind of look like this so they aren't for today and I understand that but I wanted to give you something to where you'd have a a piece of paper you could compare small cap value in the S&P 500 you could look at it one year at a time you could look at it all small cap all S&P 5050 40 60 60 40 802 you got it every combination here all those years uh going from 1970 I'm sorry yeah 1970 through 20 22 and we can find out how did they each do and then we could even protect and we invested in them and what here's what I like I mean this really I I think is is mindbending by adding 10% on the far left we have the S&P 500 you can't see it it's 10.4% that was the compound rate of return the worst 12 months was a loss of 43.3 the worst draw down was a loss of 51 if you were adventuresome enough to put 10% into that portfolio instead of 10.4 you have gotten 10.8 instead of oh well of course now you're going to have bigger losses yeah 6/10 of 1% in both cases standard deviation is still the same in fact personally I don't mind moving further over to the right and saying look this is not taking big risk this is not like cryptocurrency in fact what we're doing if you think about it if we add it to the S&P 500 we go from having 500 stock to maybe maybe having 2,000 or500 and yeah one by one they aren't great quality but not are all the S&P 500 companies hey are you keeping time by the way I have no idea I want to look at it two ways because I'm not going to get through all the slides by the way if you do look at the PDF that we provided uh to the folks here it not only has these slides but two nights ago I made a 45-minute presentation about this to a aii all the slides are in the PDF and there are some killer slides I can't show you today here we have the S&P 500 on one side small cat value on the other same thing except we put money to work starting in 1970 $1,000 this is something your grandkids your kids need to know about and you and and you put away monthly $83.33 and then every year you up that by 3% a year so that you were kind of replicating what inflation might have been and then what happened is you put it into the S&P 500 only that's the far leftand column and at the end of that period I don't read well but I think it's around uh3 plus million dollar well I do read well but not from this distance if I look at the small cap value it's a holy moly it looks like it looks like well well over 20 can you actually read that yes I can of course I sleep with this understand but every time you add a half a 10% small cap value you can see what happens to the bottom line it goes up by about $500,000 a year I mean per per per column that's important but I want to and and that's good but if you think that's good I want to talk to any fire movement it's Brad Barrett here today by chance and no and no fire movement people here well let me tell you they're standing behind you because they're trying to learn how to invest like you're investing but they're young and they want to retire at 40 45 or 50 um this next chart table I'm going to show you instead of being a accumulation table it's going to be more aligned to what we might be thinking and that is distributions in retirement now yes this is all it on this page but please understand that I'm just I'm I'm having this replicate the the equity portion of your portfolio Okay so you may only have 20% inequity but I want you to see what happens here and what we have with the S&P 500 starting with a million dollar taking out $40,000 increasing that by real inflation every year over this period of time you would have taken out about 8.5 million doar over that 53-year period and at the end of that period with the S&P 500 you would have been left with about $9 million I do not know anybody I've ever met that would say that was not a good outcome now it's all Equity so I'm not recommending we go put all over our money in equity for for retirement but that shows in the equity part but I just want to go one tiny step to the right and add 10% small cap value and when I first saw this I actually didn't believe it I said darl there's something wrong and then he went through the whole thing line item by line item confirm everything was right instead of $9 million it's about $25 million because that's that impact of that that uh 410 of 1% I'll tell you what else it is and this is why I love adding other asset classes to the S&P 500 that when we look at that period 20 000 through 2009 what we know is that was not good for the S&P 500 and so you actually over that period of time you went from about let's say 6 million down to about 3.7 million over in the let's take the 50/50 you were at 22 million in the beginning and you ended at 31 how can the S&P 500 be roll dropping Like a Rock oh I didn't see your fingers am I I've got running out of town okay look at the table and and I am out of town but I want you to see this and look look at the PDF here is why people can shy away from small cap value every time you see a green area small cap value is doing well but every time you see it moving sideways next to the S&P 500 it means it's not doing better than the s&p500 which means over half of the time you were not doing any better than the S&P 500 and if you're an adviser and you're advising clients and you're not doing well and they're looking at that what's that small cap value in there for and it's because they don't want to hold it for 17 years to get the premium it is not easy and then I'm going to go forward here and just show one more and that is uh avantus did this study we're going to write it up I think it's beautiful study show The Return of six different small cap Val value indexes six different small cap growth indexes six different small cap blend indexes and the difference between the best index over 15 years and the worst was about 2 and a half per. I mean you could be in growth or small cap or core small in an index and simply be in the wrong index which it means that we need to understand how indexes are being constructed if we're going to be an index investor that's boot camp on our website that's me teaching classes these are free books my time is up thank you Jim and thank you [Applause] all

Channel: Bogleheads

Views: 5,992

Keywords: Bogleheads, John C Bogle, index fund, Jack Bogle, investing, indexing, portfolio, personal finance, bonds, finance theory, stocks, economics, asset allocation, asset class, Bogle center, Vanguard, Bogle Center for Financial Literacy, retirement, accumulators, F.I.R.E., financial independence, Behavioral Finance, Financial Wellbeing, portfolio theory

Id: oGFRB0T8j_o

Length: 18min 20sec (1100 seconds)

Published: Sat Dec 23 2023