Is Small Cap Value Worth It? Ben Felix Explains the Truth About AVUV & Factor Investing

17:49Mindy Jensen:So how do you know which one is the one to invest in?

17:53Ben Felix:It depends what exposure you want. I mean, our firm uses Dimensional. Avant has just launched ETFs in Canada. They didn't have business here previously, so we'll be looking at that. But we've been using dimensional since they came to Canada in 2003. And it's because they're taking everything that we know about the asset pricing literature in academia, and they're implementing that in portfolios. So we've talked about the main asset pricing factors, but there are all kinds of other little details and nuances that they do to make things as efficient as possible. So we like that. Now, does that make it right?

18:26Ben Felix:I mean, if somebody said that they want to invest in the S &P small cap 600 value ETF because they like that index. I mean, that's fine. We like dimensional because they're taking the best of academic research and putting it into a product and keeping it constantly up to date. But like that doesn't guarantee that it's going to outperform. It doesn't make it an objectively better product. I think a lot of stuff in this world of picking an ETF is going to come down to preferences and really perceptions. When spring hits, some people suddenly just want to declutter the garage, clean out the closets and get everything all organized.

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20:57When does a company leave a fund like Dimensional's or Avantis's small cap value funds? And when does it enter?

21:04Ben Felix:That's a very practical question. As not one of the managers of the fund, I don't know if I have a really good answer. It is going to be different too, where Dimensional is more focused on small caps specifically, whereas Avantis will let their small cap fund drift more into mid caps. They may actually even allow mid-caps in their universe. So it is going to be different, but they will have breakpoints and they will exit securities when they get to a certain point. But what exactly those are, I mean, that's a dimensional level question, not a Ben Felix question. Fair enough. Well, how about for a Ben Felix level question?

21:36What does, generally speaking, good look like? What does the research suggest ought to be some of these boundaries to stay in this world and actually get the benefits of small cap factor investing?

21:47Ben Felix:That's a tough question. It's really like how much small cap value exposure or how small should you go? There's no right answer to that question. It's kind of like analogous to how much should you have in stocks versus bonds. It's different, but it's kind of like that. And there's no objectively right answer to that. It's like how much additional risk are you willing to take? How much tracking error relative to the market are you willing to take? We've had him on a couple of times, but we had a while ago the CIO of Avantis, Eduardo over peto on our podcast. And we asked him who should be a 100 % small cap value investor.

22:21Ben Felix:And he kind of laughed and said that you have to be a very special person to be a hundred percent small cap value. But again, you know, is, is vanguards using the crisp small cap value index? Is that the right definition of small cap value or is dimensionals smaller and cheaper or Vantus is smaller and cheaper approach better. It's they're just different. They're different exposures. If you want to capture the small cap value premium, generally speaking, you do want to be in a smaller, cheaper, more profitable fund. One of the reasons why we've gotten very interested in this over the last couple of years is because CAPE, even if you make sensible adjustments like Big Earn, Karsten Jeske does, to his CAPE modifications for things like retained earnings, share buybacks, those types of things.

23:06With the CAPE ratio being very high, the cyclically adjusted price to earnings ratio over the last years for those who are struggling to follow here. That is giving me pause about being completely concentrated in my equity position in the S &P 500, for example. Are you seeing that interest emerge among a lot of investors who follow your channel and your work? And is that something that you worry about at all?

23:27Ben Felix:Yeah, but I've been worried about it for like 10 years and the market just keeps going up. You know, at a certain point, you have to kind of just admit defeat. I don't know. What I've said for a long time is that the CAPE ratio is not a reason to change your portfolio, but it does make me feel pretty good about the fact that we are tilted away from the largest and highest priced companies. So it's a tough signal, right? It's a very noisy signal. We've looked at CAPE predictability in the U.S. and other markets, and there are a lot of cases where you can have really high future returns from a ridiculously high starting CAPE ratio.

23:59Ben Felix:They do eventually come down usually, but it's just so hard to predict. And we've seen that, like I've been saying for years now, the U.S. market, the CAPE ratio is so high, the expected return is so low, which is kind of the inverse of the Cape. And it just hasn't happened. The market return has continued to be ridiculously high. I mean, is that a good reason to be in small cap value or to move away from market capitalization waiting? I do think so, but I would have trouble saying that it's like a timing signal. Being tilted away from the largest and highest price companies is good, period, at any time.

24:32Ben Felix:I don't know if I would say it's particularly good now. However, there are a couple of cases going back through history where the US market has had a crazy one where the leading up to the dot-com bust, the Cape ratio was nuts. Japan has had one where their Cape ratio got even higher up to 1989. In both cases, you had a lost decade in the case of the US where the US market delivered basically a 0 % return for a little over 10 years, longer if you measure it in Canadian dollars. And Japan, I mean, they had a crash in end of 1989, 1990. And in real terms, you still haven't recovered from that crash.

25:06Ben Felix:In both of those cases, in the US last decade and the Japan lost whatever that is, small cap value in both countries did perform well, while the market was flat, basically, for a very, very long time. So again, not a timing signal. You shouldn't shift into this strategy now. But in the past, when CAPE's been high and returns have been low in the future, small cap value has performed well. So in the last six months, small cap value has been on a tear. It's up 30 %-ish from Q4. It's up 42 % from this time last year versus the S &P being up about 28 % from this time last year. Does that change anything, how you feel about factor tilting towards small cap value given its recent exceptional performance?

25:47You've finally been right. You said you've been wrong for 10 years on the S &P 500, right? But now the small cap value has been on this tear. That's a huge, huge outcome.

25:55Ben Felix:Yeah, it's been even crazier in Canada. I don't have the number in front of me, but the performance of Canadian small cap value has been just obscene. And I mean, yeah, that's been nice. It doesn't change my perception. Like, I mean, it's nice to know that small cap value can still outperform because for a while there, it looked like it couldn't. So, you know, good validation. Glad to see a bit of a comeback. It's still struggled over the last, you know, 10 or so years, although Canada, it's starting to pull ahead. But yeah, I don't think that recent returns should ever change your perception of an investment strategy.

26:27One actually follow up on that, though, is the Shiller CAPE ratio is, by definition, a recent returns. The current price to cyclically adjusted earnings is a pricing mechanism. So when it's high, that's when there's evidence that it may underperform over the next 10 years. And of course, that does not have to be true and there's no timing mechanism behind it. Does that at all inform the investment strategy that you guys have over at your firm in terms of how you think about asset allocation across factors? Like, does pricing ever come into play?

26:55Ben Felix:No, we don't. We've looked at this and the predictability, the level of predictability that you get from CAPE is just not strong enough to make asset allocation decisions. The way that we do use it is when we set our expected returns for financial planning, we do incorporate the CAPE ratio there. And so we might tell clients, you know, you need to save a little bit more if the CAPE is high or you can spend a little bit more if the CAPE is low. But we don't say you should get out of U.S. stocks and into Canadian stocks based on the relative CAP ratios.

27:21Mindy Jensen:Ben, last year, Frank Vasquez helped me walk through setting up a golden ratio portfolio. And the small cap value that he put me in was AVUV. He had nothing but great things to say about this. Why does AVUV specifically come up when talking about small cap value?

27:41Ben Felix:I don't know if I know who Frank is. So I don't know why he would have picked AVUV, but I'll tell you my sort of thought on why it is relatively popular. So I mentioned Dimensional Fund Advisors. They've been around since 1981, and they really pioneered this approach to investing. They built small cap funds, and then research on value came out with the Fama and French paper, and then they built value funds, and then they combined them. And then they've since added other asset pricing factors to their portfolio construction. And they do have a bunch of other stuff, like little details. I don't know, like the way that they trade stocks, they account for things like momentum in the recent share price, because there's evidence behind that as a phenomenon.

28:18Ben Felix:But although it's hard to exploit as a standalone factor anyway. So they've been doing this forever. Avantis started in 2019, where a group of people from Dimensional left. And they did something really smart strategically in launching ETFs. Because Dimensional, while they've been around forever, they did not have ETFs. Their funds were at the time, now they have ETFs, but they were at the time only available through financial advisors. And so there are a lot of people out there who were, you know, boglehead type investors and index type investors who were interested in factor investing, but they couldn't use dimensional funds without going to an advisor, which a lot of diehard DIY folks would just never do.

28:55Ben Felix:And so Avantis, I think, really won over the hearts of a lot of retail and DIY investors by being the first to market to launch this type of ETF. Dimensional had decades of runway, and they built a great business. It's still a great business. They have great products, but they were not accessible to retail investors. And so as soon as Avantis came and said, here are ETFs, I think there was a lot of pent-up demand for that type of investment. And that really created a lot of momentum for them, specifically within the retail and DIY community. I would guess that's why. Got it. Is there, at this point, a meaningful difference between the value funds offered by Dimensional and Avantis, or are they pretty close?

29:33Ben Felix:Dimensional Avantis would hate me saying this, but they're pretty similar. They do have differences in how they measure stuff. Avantis uses a different measure of profitability than dimensional. There's a whole debate about, I can't remember the two accounting terms, but two different types of profitability that you can use as a metric. Which one's better? There's debates over accruals and how that fits in to measuring expected returns and a bunch of other little details like that. How much momentum should affect implementation. So they do differ on things like that. They differ on how they treat IPOs, but like realistically, they're both tilting toward smaller, lower priced, higher profitability companies.

30:11Ben Felix:They're excluding small stocks. They grow their assets aggressively. They both got low fees, low turnover. They're both well, well-managed companies and products. So a lot of it comes down to preference. Like even within their small cap value funds, Dimensional is much more small, small, whereas Avantis has more mid caps. So if you care about that, you might go to Dimensional or Avantis, depending on what you want. Yeah, I would have trouble saying one is just better than the other. I think they're just different. Got it. Tell us about, in a general sense, like we have small cap value. What does the research say about large cap value or international small or large cap or international emerging market value?

30:46Where do these other factors come into play? These are all, in many cases, funds offered by Avantis and Dimensional.

30:51Ben Felix:These massive pricing factors work everywhere. The idea that smaller, lower priced, more profitable companies that invest conservatively, particularly among small caps, have higher expected returns is as true in emerging markets and developed ex-US markets as it is in the US. The dimensional products that we use have those tilts toward the factors that we've been talking about across all regions and across all market caps. When would you want to, for example, go from small cap to large cap value though? What's the use case or theory behind that? I would have trouble saying, you know, let's switch from large cap to small cap.

31:25Ben Felix:I think that the big limiting factor in a lot of these strategies for actual human investors is tracking error, how much different you're going to be from the market in terms of your returns over time. If you go 100 % small cap value, and you can see this with AVUV, if you just look at its returns since inception, you're going to get a ton of tracking error relative to the market. Sometimes you're going to be down, sometimes you're going to be up. In the long run, yeah, we expect it to be up. But I mean, up until recently, small cap value in the US has gotten just obliterated. That sucks to live through.

31:53Ben Felix:Like it's not fun. And you're questioning the whole time, is this strategy broken? Am I doing the wrong thing? and you're underperforming. The more you get closer to the market, so if we add back in mid caps and large caps, maybe with a value tilt, you get closer to the market and your tracking error decreases. We like to use products that start with the total market. We own all the stocks just like an index fund would. And then across all market caps, we're going to tilt toward the asset pricing factors that we've been talking about. So you get a total market portfolio with those tilts across all regions, across all market caps.

32:25Ben Felix:You still get tracking error, but not as extreme as you would have if you were just in a small cap value portfolio. One of the most popular strategies, I think in the FIRE community, which we talked to, which I'd love to talk, get your thoughts on in a follow-up episode. I know you have great thoughts, very reasonable takes on the financial independence community. But I think a lot of people basically stick it in VTI or VOO, a total market broad-based fund, and call it a day during the accumulation phase. And I think that's great. I think that as folks actually approach their FIRE number, some folks just stay in there and bobblehead forever.

32:56and get very, very wealthy so that withdrawal rates math doesn't really matter because they're so far beyond that number. But I think a lot of other people begin to think about what's a different portfolio that makes sense here. And the 60-40 stock bond portfolio is very unpopular in practice for the FIRE community because bonds offer such low yield and are so likely to destroy wealth over very long investing time horizons, like 50 plus years. So I think that's where a lot of interest in factor investing has begun to take place. Can I reduce my risk somewhat, take a lower withdrawal rate, but actually invest for growth over that time period?

33:31Do you think that's the right way to begin approaching the problem? And if so, do you have any guiding ideas for folks as they construct a portfolio using that philosophy?

33:39Ben Felix:I mean, guiding principles are tough because it's going to be, again, back to that sort of analogy to how much stocks and how much bonds, how much risk do you want to take? How much tracking error can you handle? I think in principle, what do we expect from tilting toward other factors, factors other than the market risk premium, we expect, you can't really call it diversification because we're not adding new assets. It's like you start with the market, you tilt toward the asset pricing factors. You're getting what I would call a more reliable expected outcome because you're relying on more risk premiums.

34:09Ben Felix:I mentioned the US lost decade in the Japan example where the equity risk premium, so the VTI or the VOO, it can be zero for a long period of time. And there have been, if you go back through US history and other countries' histories, there have been extended periods of time where the stock market as a whole delivered a zero return or even a negative return if you adjust for inflation or risk-free assets. I mean, a lot of people who are in the FIRE community today, a lot of people who have been in VO and VTI today have not lived through those types of periods. I'll even go farther than you on what you're saying here.

34:40And I'll say a lot of people in the FIRE community who have left their job and relied on their portfolio made a bad decision by keeping their money all in equities during that transition period and had a good outcome where the market went up. That's how I'll phrase it, frankly, there. And I think that that's going to catch up one day with a lot of people. And that's where this discussion begins, gets increasingly important. And I think people are wising up to that. And that's why there's a greater interest in general in factor investing, which I think is a reasonable middle ground solution to a truly defensive portfolio, which is inappropriate for a 40-year-old with a very long time to live.

35:15I think there's real trade-offs there that require thoughtfulness.

35:18Ben Felix:Do you want me to give you like a really, really nerdy take on this? Please. Yes. Okay. Okay. Okay. The cap M, the capital asset pricing model, single factor pricing model that exists. Theory came out after that on the idea of something called an intertemporal capital asset pricing model, I cap M. So in the I cap M, you don't just care about volatility, which is what you care. And this is a bit of a simplification, but you don't just care about volatility, which is what you care about with cap M. You care about when the volatility shows up. Okay. And, and, and the ICAPM is one of the theoretical, theoretical explanations for why the factor premiums exist, because the risks of those types of stocks show up at times where most investors don't want them to show up.

35:57Ben Felix:So a simple example, one important point is that we don't actually know what the risks are that people care about. I asked Eugene Fama about this. He's like, he basically came up with these ideas when he was on my podcast. I was like, what are the things people care about? Like, how do we know that. And he kind of laughed. He's like, what do you mean? Like, can we get inside everybody's head and figure it out? Like, no, we just, we can't know. We just have to, it's the theory. The theory is that there is some risk that people care about, although it's hard to identify what it is exactly. But if we use an example of recession risk, so say value stocks as just as an example are exposed to recession risk, which means that when there's a recession and your labor income, your job is at risk, you're at more risk of losing your income.

36:36Ben Felix:If value stock could do badly at the same time, there's a good reason that people would be willing to pay less for those types of stocks. So that is one reason that there may be a value premium. Now, if you are financially independent, if you don't have labor income risk, the optimal portfolio for you is actually the fact to tilt the portfolio. The optimal portfolio for the average investor is just the market cap weighted portfolio. But if you're not exposed to the same risks as the average investor, if you don't have labor income risk, which a lot of people do have, your optimal portfolio is to tilt toward whatever where the risk factor is that we're talking about.

37:08Ben Felix:So in an ICAPM world, there is actually a very interesting implication for people who are financially independent, people who don't have to worry about their labor income risk. They're also called pure wealth investors where their only risk is their portfolio. And in the theory, they are the people that should be tilting toward the factors. Is that nerdy? I don't know. That was very nerdy. And then just for the people in the back here who have followed the small cap value discussion and by that argument, what are the other factors? that you're referring to in this. Eugene Fama and Ken French in 1993, they come out with a three-factor asset pricing model.

37:42Ben Felix:So they say assets are priced based on market risk, relative price, which is value and size, which is, well, size. So time goes on. There are more anomalies that get identified and papers are coming out and saying, oh, the three-factor model doesn't price this and it doesn't price this. And so in 2015, Eugene Fama and Ken French came out with a new paper with a five-factor asset pricing model. And broadly speaking, and again, there are little differences, but broadly speaking, Dimensional and Avantis are using this five-factor asset pricing model, which is again market, relative price, size, profitability, which we talked about, and there are different ways to measure that, and investment or asset growth, growth in the book value of assets.

38:20Ben Felix:And in their 2015 paper, Fama and French do something that sort of ties it back to theory. But when I asked Gene Fama, is their five-factor model a theoretical model or an empirical model? He's very clear that it's an empirical model. Like there's no really strong foundational theory that says these are the factors that should be in the model, but they do use the dividend discount model and go through this sort of step-by-step. If you do a couple of transformations from the dividend discount model that account for things like dividend irrelevance, and then scale the equation by book value, you do get an equation that shows that relative price, profitability, and growth in the book value of assets should be related to the discount rate of the stock.

38:56Ben Felix:It's like a light theoretical explanation for why those specific factors ended up in their model. In a practical sense, So we follow this through to conclusion. We build a portfolio in some of these funds like AVUV, LV, AVLV, AVIV, AVDV, and AVEM, using some of those funds, right? Very fast there. Those are ticker symbols that broadly map to the factors, I think, that you just discussed here, or some of the factors that you just discussed here. What's interesting about that, you know, I was playing around with that and prep for today's show, is you actually get a dividend yield on the portfolio of like in the high twos from that portfolio, not because you're going chasing dividends, but just because that's what they happen to yield.

39:33And that is very close to the withdrawal rate that many would argue in that kind of low threes range for an early retiree. Can we get more aggressive about withdrawal rates if we implement this research based on what you're finding here? By the way, that's not the earnings yield on these portfolios, which is much, much higher, which is why we're moving towards these factors in the first place, basically underlying theme behind it. But does that change the withdrawal rate math for early retirees, in your view, between the dividend and the earnings yield on this portfolio?

40:04Ben Felix:I did a podcast episode years ago where we looked at a bunch of different portfolios to find the highest safe withdrawal rate. We're just messing around, but we did find that, and this is just using historical index data, not live fund data, which can be quite different, especially for small cap value. We did find that small cap value supported a higher safe withdrawal rate. But, you know, that was just kind of a little fun little exercise that we did. Will that be true going forward? Who knows? I mean, listen, if we're investing in these things because we expect higher returns, and I think especially if you can be a little bit flexible with your spending, like if small cap value tanks, you're not going to just continue mechanically withdrawing.

40:39Ben Felix:In theory, like if we're saying that the sort of stated fact to start the conversation is that we expect higher returns from small cap value, high profitability, low investment, it should support a higher safe withdrawal rate. Will that work out in practice? I think it's going to depend on your ability to make adjustments to your spending over time because these things can also be more volatile. Like if the market crashes in a short period of time, small cap value can get completely smoked. Like COVID was an example where small cap value got just crushed and large cap growth actually did better in that case.

41:09Ben Felix:And so if you're pulling out your normal planned withdrawals during that time, I mean, I'd start to get worried about you. But if we just think about it from the perspective of expected returns, if we do expect higher returns, then it should support a higher withdrawal rate with a caveat that I think you have to have some flexibility in your spending, which, of course, the 4 % rule type thinking does not allow for. Well, I think the million or maybe much more than that dollar question that people watching or listening to this show are going to have is how much should I tilt towards these factors?

41:40Specifically, how much should I wait to small cap value? If I use a dimensional or of Avantis fund, it sounds like that's like the academic debate between VTI and VOO. Pick one. That's entertainment purposes only. But it sounds like the question is, how much do I wait towards these factors? And how much more do I wait towards small cap versus international small cap and those types of things? And obviously, that goes way past the line of what we can discuss plainly on a podcast episode. But how would you leave somebody who just listened to this, buys the argument for small cap or factor investing?

42:11How can they begin to make a decision that's high quality around that?

42:15Ben Felix:There's a topic in my podcast community. we have just like it's a free community community.rationalreminder.ca it's I think there's like 14 ,000 members in there right now and it's very very active but anyway there's a topic in there that was from years ago called I think how much factor percentage and why and it I don't know how many posts are in there I can look it up but it became this just massive topic because everyone was discussing and debating and trying to figure out the answer to your question I don't know if anybody ever ever solved it let me see if I can find it. I'll tell you that the read time, here's the answer to your question, not actually, 1 ,396 minutes of read time to go through that entire topic, which I think is still inconclusive.

42:58Ben Felix:Basically what I'm saying is it's like an unanswerable question that it just depends on your preferences and your conviction and your beliefs and what expected returns you are assigning to the different types of factors. But there is no one answer. So when Avantis first launched their ETFs, I was excited too. We had taken some criticism over the years because on our podcast, we would talk about this stuff, but small cap and value tilting and factor investing. Some people would say, well, this just sounds like a sales pitch because we can't actually use the funds that you guys use at your firm.

43:27Ben Felix:And I didn't like that. So I made a model portfolio using ETFs that anybody could use. And initially it used a couple of iShares ETFs. There was a value ETF and a small cap value ETF. But then when Avantis launched their products, I redid it with their funds. And it was mostly Canadian listed ETFs. And then these two US listed Avantis ETFs. And the intention was really to as close as possible and as simply as possible, cleanly as possible, mirror the overall exposures that we have in our portfolios at PWL. And that portfolio was roughly for the equities, 75 % market ETFs and 25 % small cap value ETFs.

44:06Ben Felix:Now it's also worth saying that's not how I would design it under sort of optimal conditions. I think it's better to tilt across the full market cap spectrum to have large cap value and mid cap value and all the way through rather than just focusing on small cap value. I used small cap value because there are currency conversion and withholding tax considerations that I had to think about. So I was trying to minimize the dollar amount of US dollar ETFs in my model, which is why I used small cap value, which is like a higher potency sort of form of factor exposure. But I would prefer to do what we do in our portfolios, which is tilt across the full market cap spectrum.

44:41Ben Felix:But just as a sort of guidepost, that model portfolio was 75 % total market and 25 % small cap value. Is there some meaningful reason to tilt towards small cap value? But this is not like go mostly into small cap value. Very, very few people would defend go mostly into small cap value or these other various factors away from the total market. Some people might. I mentioned our podcast community. We have some people in there who I won't call crazy, but they're pretty intense about their factor investing. And some of them do have all small cap value portfolios and that's, they're okay. They're comfortable with it.

45:16Ben Felix:They're comfortable enough with the research and with the potential for tracking error and underperformance that they're willing to live with that. And as we've talked about it, it has actually done well recently, but there could be periods, long periods where it doesn't do well. I said this earlier, but I really think that one of the biggest limiting factors for this approach to investing is your ability to withstand performance that is different from the market. Like not being in the US market because you were in US small cap value or your international small cap value for the last 20 years.

45:45Ben Felix:It's not that fun. Well, Ben, this has been absolutely fantastic here. For the second hour of our show, we'd love to debate chocolate with real estate. You got that? Okay. All right. Next time. Next time. Another time here. This has been fantastic. I learned a tremendous amount. Thank you for sharing this. And I'm I'm going to probably make some fiddles to my portfolio based on what I've learned from you on this topic. You, Paul Merriman, and the originators of a lot of this research as well. So it's a really fascinating topic. I think it's really important. I think it's particularly important to people who are thinking about financial independence early in life.

46:18Ben Felix:Awesome.

46:19Mindy Jensen:Yeah, I can't wait to go in and find all those papers that you mentioned and start reading those. Like really nerd out on that stuff because I have not read those papers yet. and I'm hoping to be able to link to them on our website so that people can find them easier than I believe I'm gonna have a hard time finding them. Do you have them?

46:36Ben Felix:I'll tell you what I can do, Mindy. I did a YouTube video recently. Oh, the title's changed. I guess we were doing some A-B testing. It's currently called This Paper Could Change How You Invest but it's basically an overview of everything we talked about starting from the CAPM to the three-factor model to the five-factor model and then right up to the products that were created based on that research. So I can share that link with you. And then in the video description, I also have a link to all of my academic sources.

47:03Mindy Jensen:That would be fantastic. And we'll include those links in our show notes for this episode so that people can find them easy as well. Yeah, because I'm excited to dive into those papers.

47:13Ben Felix:It's very nerdy. It's properly nerdy stuff.

47:16Mindy Jensen:I love that.

47:17Ben Felix:I love it.

47:18Mindy Jensen:Thanks, Ben. All right. Well, like Scott said, this was super fun. I have to go back and listen to this without taking notes as I go, just so I can figure out exactly what it is that you were saying, because you did blast through this pretty quickly, but you gave us so much information. I am so thankful for your time today. Thank you so much. Before you go, Ben, could you tell everybody where people can find you and your community?

47:38Ben Felix:Oh, yeah, sure. So my YouTube channel is just my name, Ben Felix. I also have a podcast called the Rational Reminder Podcast, where we post pretty nerdy stuff weekly. The one we have coming out next week is, I think we're pushing the limits of like what people will actually listen to in terms of nerdiness, but we'll see. And then I do have the podcast community, community.rational reminder.ca, which is a closed community. You do have to sign up, but it's not paid. It's free. It's a really nice place where some very nerdy people have very respectful, good discussions about these kinds of topics.

48:07Mindy Jensen:Awesome. Thank you so much, Ben. And we will talk to you soon.

48:10Ben Felix:Thanks guys.

48:11Mindy Jensen:All right, Scott, that was Ben Felix. And that was absolutely fantastic. I loved everything he had to say. And now I need to go back and listen to it all again. So I can really, really figure it out. This is not an episode to listen to at 2.5 speed. This is an episode to listen to at like 0.75 speed. I think Ben is absolutely fantastic. Rational Reminder Podcast is a great show. I think folks should check out. I think he's, you know, if not the originator of the research, he is as close to it as anybody in this space. He's met the original researchers in this area. And I think it's just fantastic.

48:45I think his views align, broadly speaking, with many of the prominent folks that we've talked to, like Frank Vasquez and the Golden Ratio portfolio, like Paul Merriman over the last couple of years. And then Bill Bengen, originator of the 4 % rule, used some of this factor research to inform his updates in A Richer Retirement, his new book. This is not new stuff for really that controversial stuff. It's pretty well-established research. How it performs in the future is anybody's guess. I think it's particularly interesting to me. And I'll also say that I ran that experiment, if you remember back in Q3 of 2025, where I put$10 ,000 into four portfolios, specifically using this kind of research.

49:26So it might be a good time to check in on those portfolios if you're interested and do a quick update as we close out this episode.

49:33Mindy Jensen:Absolutely, Scott. We should check in on your portfolios and see how they're performing. Okay. So I've got all four of my portfolios pulled up here and I'll share my screen, my entire screen in a moment. Just a reminder that this is a short-term, so far, short-term experiment. So Scott's performance is not indicative of future gains either. And it's for entertainment purposes only, of course. Scott, entertain us with your portfolios. As a reminder, what I set up was first, a traditional stock bond portfolio, 60-40 stocks bonds. I set this up probably early October 2025, which is also when I happened to rebalance my my personal portfolio as well, not covered by these portfolios.

50:15The first one was a 60-40 stock bond portfolio. So$6 ,000 started in the total stock market index fund and$4 ,000 started in the bond fund. Bonds have basically gone nowhere while we've seen a small amount of growth in the total stock market over that six-month period. The next portfolio was just straight up S &P 500, VOO. That portfolio has had about a 4 % to 5 % cumulative return over the last six months. So great, almost exactly near the historical long-term averages of what you'd expect from the S &P 500 over that period. I could probably do this over six months, actually, to be a little clearer with each of these portfolios.

50:51The next portfolio was the risk parity portfolio designed by our friend Frank Vasquez and modeled basically off Mindy's portfolio. That portfolio has jumped about 680 bucks or 6.8 % over the last six months. And the last one was my timing the market portfolio, where we've tilted essentially entirely away from large cap and towards small cap value, international small cap value bonds, which are specifically held so that if the S &P 500s, the Shiller-CAPE ratio goes below certain historical norms, I'll pivot that back to the S &P 500 in VOO. And then there's my real estate ETF, which is about paced what we're seeing from the S &P 500 over that six month period as well.

51:36So, so far this portfolio, the timing the market portfolio is up, but again, this is a short period of time. So this was a very simplistic expression of a little bit of a factor tilt here in AVUV, AVDV, BND, and VNQ. That's what I got.

51:49Mindy Jensen:Scott, I think it's fun to experiment with these smaller amounts just to see what's going on in different sectors of the market, especially if you are still in your growth phase and you want to see, well, I wonder how small cap would affect my current portfolio. I definitely wouldn't recommend somebody who wants to just test it out, do it with a large portion of their portfolio. But you took$40 ,000, split it up into four. I took$10 ,000 and put it into my Frank Vasquez portfolio, my Frankonomics portfolio. I am withdrawing the equivalent of 5%, which comes out to$42 a month. And I am up since July of last year, I am up to$11 ,529.

52:34Mindy Jensen:And that is with withdrawals equal to a total of 5 % per year. And this is the golden ratio portfolio that Frank set me up with. So it's fun to watch this grow. Gold has been my biggest growth for the longest time. And when I have to rebalance, I have to pull it out of gold because it keeps going up. I did not have the same. I've had about 7 % gain on gold in my portfolio started in October because I missed that huge run up by starting that portfolio later than you did. So it's just interesting how the timing of this, everyone will have it. Almost everyone will have a different experience of this because when you create the portfolio, you're going to have different valuations.

53:10So those will normalize over very long time horizons, but that's the fun of investing.

53:14Mindy Jensen:And if$10 ,000 is too much for you to experiment with, start with$1 ,000. See where the growth is. see what you're comfortable with. Because if you go in there and get obsessed like some of us are, and you're checking it multiple times a day, you'll see up, down, up, down, like all day long. In some cases, it just keeps going up. That's always fun. It just, it gives you more of a real time look at what's going on in different sectors of the market. So if there's something you think you want to own, try it out with a tiny little bit, see what happens. All right, Scott, there There are multiple different ways to determine a small cap value fund.

53:51Mindy Jensen:Ben shared, I think, three different ways to determine the small cap value fund. I recently wrote an article called Stop Optimizing When Good Enough is the Best Financial Decision You Can Make, talking about how people can sometimes obsess over different little factors or different big factors in their life. And I think the determining which small cap value fund do you want to invest in falls under this optimization trap where you're constantly trying to get a better return and get a better return. Make a decision and stick with it. If small cap value is the right one for you, if you want to start adding small cap value to your portfolio, determine which fund you're going to invest in, make the decision and just accept it.

54:34I think the decision whether to allocate to something like small cap value or large cap value or international value, that's a big decision, right? That's going to change the course of your, you know, the next couple of years in terms of the ride you're going to experience if you decide to tilt away from the stock market, you know, S &P 500 or total market to those. But what's not a big deal is, you know, that we've discussed in the past is really like investing between VTI and VOL, like a total stock market index fund in the S &P 500. Those correlate very closely. And I think that's the parallel with some of these funds.

55:06I think that that applies only in this good tier of value investing funds. There can be a big difference between a bad, a small cap value fund and a good one. But I think once you get across a couple of good ones, those last points of optimization begin to maybe not matter as much.

55:21Mindy Jensen:Yes. And it doesn't have to be an all or nothing scenario. If you're trying to decide between VOO and VTI, put 50 % of what you were going to allocate into each one and see which one performs better. Maybe you discover that you like VOO better or you like VTI better, then you can move the other amount in there or move half of what was in there into the other one. I think people get really hung up on, oh, which one is the best. Here's a news tip. You are never, ever going to have the best, most optimal performance in your portfolio ever. So stop trying for perfect and focus on good enough. And if you wanna get more articles just like this, In your inbox, you can sign up on our newsletter at biggerpocketsmoney.com slash newsletter.

56:06Mindy Jensen:I would love for you to join our list. Oh, we also have more things at biggerpocketsmoney.com. We have a ton of resources. Scott has been going nuts creating resources for you, our dear listeners. They're at biggerpocketsmoney.com slash resources. We also have calculators and templates to help you accelerate your financial independence journey. So join us over there at biggerpocketsmoney.com. All right, Scott, should we get out of here? Let's do it. That wraps up this fantastic episode with Ben Felix. He is Scott Trench. I am Mindy Jensen saying see ya, Chia. I'm skeptical of a lot of financial products, but life insurance isn't one of them, at least not term life.

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