These are common arguments you read on Bogleheads, but it's important to consider that a) the type of smaller companies that are staying private longer are typically not small value companies (those would be small growth), and b) since we are talking about a risk premium, it's impossible to fully, or even significantly, arbitrage, because actual investors aren't willing to take that risk. What percentage of Bogleheads hold a specific allocation to SCV? What about institutional investors, who may lose their job for even 2-3 years of underperformance? Etc. You should read into the arguments for and against SCV in as much detail as you can to ensure you have conviction, because the core reason factor investing works is because the average investor loses conviction and sells out at the wrong time.I understand the concept of the SCV risk premium (more risky assets should have higher return over longer terms). I also understand the counter argument that since that risk/reward has been well documented the premium is probably much lower. I also understand that more small companies are staying private longer which makes it small cap value premium going forward less certain.
This is a tricky question because it turns out that historically, a number of assets were able to improve long-term return (SCV, gold, extended-duration STRIPS, etc) but did so with short bursts of performance, and for a number of periods you'd otherwise be selling equities to rebalance into them. Typically, personally I wouldn't hold those (other than SCV) in accumulation.Gold is interesting because I dont think anybody can deny that it has helped with drawdowns historically. But big extended drawdowns are rare and most of the time gold drags down overall returns. It is possible to take a speicif date where owning significant amount gold has resulted in higher returns while having lower drawdowns then a similar portfolio with similar equity exposure but most of the time the growth on the equity makes it irrelevant. I actually came up with the 10% gold was asking chat GPT what the right amount of gold was in one's portfolio that was the speed spot in terms of drawdown protection and not a drag. I think if I had gold in my portfolio I would probably hold it as part of my bond tent and get rid of if I dont hit a sequence of risk during the first few years. Once the withdrawal rate goes below to 4 or below, it doesn't really matter what one's portfolio looks like.
Here's a classic example (https://testfol.io/?s=hdvnSQO8Ahh): holding 30-year treasuries over the very long term would've gotten you more money than 100% total stock, but to get there you would've had to hold those treasuries through a 92% drawdown. Practically speaking, people aren't going to do that.
These funds buy and sell futures contracts, and options on them. An over-simplified way of thinking about this is using a commodity. Let's say corn costs $4 a bushel. You periodically buy a number of options to both buy and sell a bushel of corn at $4, and pay a small fee for the option to do so. Assuming corn stays around $4 a bushel, you consistently lose a small amount of money over time. But if corn were to drop to $2, or rise to $6, you'd make a comparatively large amount of money over a short period of time. Now, imagine a fund with a team of researchers that could predict with (even slightly) greater than 50% accuracy what a commodity price was going to do in the future, and image having teams for every commodity, as well as currencies, bonds, and stock options, each doing that for their respective position. That's basically how these funds work. In a calm market, they will typically lose small amounts over time, and will typically lose money on each trade they make, but are able to capitalize on big swings in the commodity market, or stock market. You can think of them as similar to the other assets we're discussing in that aspect.I am still reading up on managed futures. I dont quite understand how they work and why they help with drawdowns.
Each fund works a different way, so typically people hold several, or hold an "index fund" of managed futures. Overall, this is pure active management, so keep in mind that these types of funds are very non-Boglehead; however, they perform a way no other type of asset does. You are essentially giving your money to a team of traders. Historically, that's worked great, but it's not for everyone.
Statistics: Posted by breakfastinbed — Mon Jan 19, 2026 10:41 am — Replies 19 — Views 2416