Should I tilt towards small/value stocks?
Fama and French found that in the past, small-cap stocks and value stocks have performed marginally better than the rest of the stock market, when controlling for risk.[1] This is their Nobel-winning three-factor model to describe stock market performance.
We know that there was a small/value premium in the past. What we don’t know is whether or not it will continue, especially now that it’s been identified. And we won’t know until after the fact. Smart people think that the SV premium still exists, and smart people think it’s done. So what’s an investor to do?
Brian1984 asked this question on the Bogleheads Forum today. Some good answers were given, and here’s my advice.
- We don’t know if SV stocks will outperform. At minimum, they probably won’t hurt you over the long run (though they may be more volatile).
- This decision is relatively unimportant compared to others. Make sure the rest of your portfolio is in good shape, and then consider a SV tilt.
- Watch for expenses and portfolio complexity. If adding a small/value tilt will make your portfolio harder to manage, or will increase your expenses, it may not be worth it.
- Saving more is far more important than having an ideal asset allocation. You’ll probably be better off saving an extra $50 or $100 a month than “optimizing” your asset allocation.
[1] Update: looks like there is some disagreement on this. Fama thinks that the small and value premiums are attributable to risk, while French doesn’t. More on this.
