Tag: Small-Cap Stocks

Can we increase the Safe Withdrawal Rate with Small-Cap Value Stocks? – SWR Series Part 62

June 2, 2025 – Welcome to another installment in my Safe Withdrawal Series, please check the landing page for all posts so far. Today’s topic is about Small-Cap Value (SCV) stocks and whether they should have a prominent role in retirement portfolios. Some financial experts recommend adding Small-Cap Value to your retirement portfolio, which will miraculously and automatically increase your safe withdrawal rate from 4% to 5% or even 5.5%.

In today’s post, I first would like to present some simulations using historical data. Those simulation results look pretty impressive. Thus, investors in 1926 who had somehow been aware of the Fama-French research, published almost 70 years later (maybe through time travel!?), could have done remarkably well.

Of course, if you are familiar with my blog, you will know that I am skeptical of SCV. I’ve written two posts, one in 2019 and one last year, where I outline my main concern: the Small-Cap Value engine that generated extra returns worth several percentage points between 1926 and about 2006 started sputtering about twenty years ago, and it’s unlikely that now when everybody is aware of SCV, we will repeat those impressive investing results so easily. Thus, I also want to provide some simulations that factor in more realistic small stock and value premia going forward. Alas, once we scale back those factors’ return expectations, your retirement portfolio will have very little to gain from small-cap value stocks.

Let’s take a look…

Continue reading “Can we increase the Safe Withdrawal Rate with Small-Cap Value Stocks? – SWR Series Part 62” →

Small-Cap Value Stocks: Diversification or Di-WORSE-fication?

December 2, 2024 – Many of you have asked me to comment on a recent phenomenon in the FI/FIRE community: Small-Cap Value (SCV) Stocks. Oh, my! Just when I thought we were making progress in the personal finance community, a new fad comes along and threatens to undo all that hard work. When you thought everyone was on board with simple, stress-free, and hands-off index investing, I sense that people feel the itch again to tinker with their portfolios – this time with “Small-Cap Value (SCV) Stocks.” To be precise, small-cap value is nothing new. I’ve written about my SCV skepticism in a post over five years ago. But the way it’s sold now is from a new angle, and it’s getting traction in the FI/FIRE community. The SCV media blitz relies on the latest narrative that, sure, broad index funds (VTI, ITOT, etc.) are a great and simple way to reach your financial goals. But SCV is an even better way—a “more optimal” way to reach your goals. Allegedly, SCV is the secret sauce for accelerated financial success for astute and enlightened investors.

But alas, much of that narrative is hype and false advertising. In today’s post, I want to reiterate the case for simple broad index investing. Let’s take a look…

Continue reading “Small-Cap Value Stocks: Diversification or Di-WORSE-fication?” →

How to Beat the Stock Market

December 9, 2020 – Right at the start, let me point out that, no, I’ve not gone to the bad side! I will not try to sell any actively-managed funds here. If you’re a part of the passive investing crowd, which is a large portion of the FIRE community, you might find the title a bit “clickbaity.” Because the thought process of the average passive investor would go like this:

  1. Underperforming the VTSAX is a non-starter. That’s highly undesirable. The only assets we’d ever consider are those with an expected return equal to or larger than the VTSAX!
  2. But the problem is that nobody can beat the market due to efficient markets!
  3. If we intersect the two sets above, i.e., constrain ourselves to what’s both desirable and feasible, we’re left with the VTSAX (or whatever close substitute you might pick, e.g., FSKAX from Fidelity).

Beat the market diagram01
A very one-dimensional view of the world: How most folks in the FIRE community justify passive investing

That line of reasoning has some advantages: it has probably convinced a lot of folks to get rid of their irrational fear of the stock market and many have benefited from low-cost index investing instead of wasting money on actively-managed funds. My concern here is that I think that this thought process of “nobody can beat the market” is overly simplistic and (literally) one-dimensional. Of course, there are ways to beat the market! Here are eight ideas I can think of… Continue reading “How to Beat the Stock Market” →

Can we raise our Safe Withdrawal Rate when inflation is low? – SWR Series Part 41

October 26, 2020 – A few weeks ago I wrote the post “Do we really have to lower our Safe Withdrawal Rate to 0.5% now?” about the pretty ridiculous claim that the Safe Withdrawal Rate should go all the way down to just 0.5%, in light of today’s ultra-low interest rates. The claim was transparently false and it was great fun to debunk it. But recently I came across another proclamation of the type “We have to rethink the Safe Withdrawal Rate” – this time proposing to raise it all the way up to 5% and even 5.5%! Well, count me a skeptic on this one, too. Though I’d have to tread a bit more cautiously here because the 5.5% SWR claim doesn’t come from some random internet troll but from the “Father of the 4% Rule” himself, Bill Bengen. He’s been doing the rounds recently advocating for a 5% and even 5.5% Safe Withdrawal Rate:

  • In September in a piece he wrote for FA-mag with a recommendation to raise the SWR to 5%.
  • On October 1, the same article, reprinted almost verbatim under a different title in the same magazine: “Choosing The Highest Safe Withdrawal Rate At Retirement”
  • On October 13 on Michael Kitces’ podcast, Bengen made another explicit SWR recommendation: “[I]n a very low inflation environment like we have now, if we had modest stocks, I wouldn’t be recommending 4.5%, I’d probably be recommending 5.25%, 5.5%” It’s not clear what made him raise the SWR by another 0.25-0.50%, though.

And the whole discussion was quickly picked up in the personal finance  and FIRE community:

The main rationale for increasing the SWR: inflation has been really tame recently and will stay subdued over the coming years and even decades. That’s his forecast, not mine! Hence, Bengen makes the case that we’d have to make smaller “cost-of-living adjustments” (COLA) to our withdrawals. Smaller future aggregate withdrawals afford you larger initial withdrawals, according to Bengen. But as you might have guessed, the calculations that justify the significantly higher withdrawal rate don’t appear so convincing once look at the details…

Continue reading “Can we raise our Safe Withdrawal Rate when inflation is low? – SWR Series Part 41” →

Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)

April 8, 2020 – Wow, we made it through the first quarter of 2020. Seemed like an eternity! Remember January 2020? Suleimani Drone strike and an almost-war with Iran? Australian Wildfires? February? The Super Bowl, the impeachment trial? Even early March: Super Tuesday (March 3). It all feels like years ago! All those daily 100-point S&P 500 and 1,000-point Dow Jones moves took a toll. They make you age in dog years, I guess!

Time to look back and reflect. Let’s take a look at a few lessons I learned… Continue reading “Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)” →

My thoughts on Small-Cap and Value Stocks

People have often asked me what I think about value and small-cap equity portfolios. So, this is a post I always wanted to write but kept postponing because I never knew how to best frame it. But now I have the perfect excuse to write it; last week, I listened to the ChooseFI podcast and they had Paul Merriman as a guest in episode 130. Paul Merriman is one of the big proponents of small-cap and value stocks. Of course, they talked about a variety of topics and I thoroughly enjoyed most of the discussion. I’m completely on the same page with Paul, Jonathan, and Brad on a wide range of issues. For example:

  • Choose index funds over actively managed funds
  • Take emotions, especially fear and greed, out of investment decisions
  • Young investors benefit from Dollar Cost Averaging. Specifically, a market crash early in your investing life can even be beneficial, at least under specific assumptions, as I wrote earlier this year in “How can a drop in the stock market possibly be good for investors?“
  • Young investors shouldn’t even consider bonds in their portfolios when starting out. They should use 100% equities and as much risk as possible.

But there’s one thing I vehemently disagreed with! Paul Merriman seems to suggest that by using a “better” or “smarter” equity allocation, specifically, overweighting the value and small-cap styles – both domestically and internationally – we can increase our expected return by two full percentage points a year. And just to be sure, this is not stock picking but simply asset class/style picking, all implemented with passive ETFs. Two percentage points of extra return? Let that sink in! 2% a year can compound to a large sum over the years, and then you retire, and you get an extra 50% of withdrawals when you add 2 percentage points to your 4% safe withdrawal rate. Pretty impressive! There’s only one problem: Merriman’s recommended portfolio didn’t return those two extra percentage points over the past few decades. And there are good reasons to believe that you will not gather those 2% extra returns going forward either. Let me explain why… Continue reading “My thoughts on Small-Cap and Value Stocks” →