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There's more to imagine when you listen. You've likely heard this in the fire community before. You need Small Cap Value exposure for long term performance Buy avuv But why? What even is small cap value and why does everyone recommend AVUV specifically over the dozens of other small cap value funds out there? If you've been confused about small cap value funds or wondering if you should add AVUV to your portfolio, this episode finally makes it clear.

Mindy Jensen (4:01)

Hello, hello, hello and welcome to the

Mindy Jensen (4:03)

Bigger Pockets Money Podcast. My name is Mindy Jensen and with me as always, is my Large Cap co host Scott Trench.

Scott Trench (4:09)

Thanks Mindy.

Brandon (4:09)

Great to be here. Together we make a blend, but you provide all the value here at Bigger Pockets Money. All right, today we're going to get some answers about small cap value and specifically what these various options in the small cap value world do. What what is the difference between a fund, you know, one fund versus another? How they classify small cap value, how they invest or exit into these companies? To get these answers we have brought on Frank Vasquez from the Risk Parody podcast. Back to the BiggerPockets Money Podcast. This is number three or four I think here at BPMoney. To break down exactly what small cap value investing is, why it matters for financial independence, and what the difference is between the various ETF options and what makes one good versus another. Frank, welcome.

Frank Vasquez (4:56)

Thank you. It's good to be back.

Mindy Jensen (4:57)

Okay Frank, let's set the stage. What are we talking about today? What are small cap value funds and what does small cap mean?

Frank Vasquez (5:06)

This research goes all the way back to the 1990s. It's famous research from Eugene Faman, Ken French. And they did a long series analysis going back to the 1920s of the stock market, splitting the stock market up into what they call factors. Factors are just characteristics. And so two of the main factors they looked at were size in terms of how big the company is. So you can rate your companies. They basically categorize them small, medium and large based on how big they are in terms of their market capitalization, how much they're worth. They also looked at what is called the value factor, but it's basically between value and growth is the spectrum we're talking about. Value companies are typically companies in state industries like Procter and Gamble is a good example of a value company. They're basically companies that typically are paying a lot of earnings for how much they cost, essentially. So they include things like high dividend companies. But they are all companies that tend to be in these kind of industries like utilities and consumer staples and, and heavy industry and things like that. Now the growth companies are all of your tech companies. And so they are expected to grow a lot. They do not have a lot of earnings for how much they cost. So if you, they're familiar with what they, what you call a PE ratio, a growth company has a higher PE ratio and a value company has a lower P E ratio. But I think the most important thing to understand about the difference between growth and value is it is a way of, of distinguishing the types of companies we're talking about. Because basically the same types of companies fall into the value category, whether they're insurance companies or utility companies or consumer staples. And the same kinds of companies end up in the, in the growth side, whether they're biotech companies or your basic large cap tech companies. So our US Market is dominated by growth companies and large cap growth companies. The way this is developed over time is this is kind of a way of segmenting the market. And if you go to a place like Fidelity or Morningstar and look at an analysis of a fund or a company, it will give you this, what they call style boxes. And this thing looks like a tic Tac toe board. And so on one axis, if from left to right, it is usually value on the left and growth on the right. And then they do small to large, small on the bottom and large on the top. And then they divide it into nine boxes. And so you can categorize things by which box they're in. If it's Like a tech company, like a Tesla, that's going to be up in large cap growth. If it's a small insurance company or something, it's probably going to be over in mid cap value or small cap value. But this is a convenient way of segmenting the market that has developed and this has been going on for the past 30 some years now. So it's very well established that this is one of the primary ways of segmenting the stock market into categories. The other main way that stock market is usually categorized is by sector, in which case there are usually 10 or 11 sectors defined. So you have like a real estate sector and utilities sector and a consumer staples sector and a communications sector. Those overlap with this growth and value thing because usually one sector type tends to be more growthy and one other ones tend to be more value. The growth versus value is actually a kind of shorthand way of saying, okay, these are these kind of sector companies and growth are these kind of sector companies. And that really is the source of the, the diversification between the two of them. I mean they're literally different kinds of companies you're talking about. That's why you look at this as a source of diversification, not on some randomness, but on actual what kind of business we're talking about.

Brandon (9:07)

There's a reason you can filter the stock market in a multitude of ways. There's a reason why people have filtered the market for small cap value in particular. And it's because small cap value implicitly drive long term returns and therefore it makes sense to relatively weight your portfolio more towards something like a small cap value fund or portfolio. In addition to having some exposure to blended or large cap growth in there, is that the correct interpretation? And can we read your risk parity portfolio that you came on and shared with us as implicit acknowledgment of that analysis.

Frank Vasquez (9:45)

There are two issues here. One has to do with diversification and one has to do with performance. Now the reason people have become entranced with small cap value in particular, and I'm always thinking of these style boxes. So the lower left hand corner of the style boxes is historically and one of the things that Fama and French found is that those kinds of companies tended to outperform the market over long periods of time. There is a raging debate going on now whether that is still true or not. But if you look at, and I think of the four different main boxes, the corners, so you've small cap value, large cap value, large cap growth and small cap growth. If you just look at Those segments you will find that small cap value and large cap growth tend to do either as good or better than the overall market. That large cap value, which includes all your like heavy dividend paying stocks, tends to underperform the market but be less volatile. And small cap growth is something you probably don't want because it's both, it's highly volatile and basically does not have a good risk reward kind of characteristic. So where people have focused then is the large cap blend or large cap growth category, which includes all of your basic index funds. That's, that's where you'll find the S&P 500 fund. That's where you'll find VTSAX. Those are large cap blend or large cap growth funds, in essence. And so pairing that up with a small cap value fund gives you a good diversification both on the size and then the kinds of companies you're talking about really is what you're going for there. And so for me the important thing is the diversification because over time you'll see that these two categories of funds tend to perform differently at different times. We are in one of those times right now that if you look at small cap value this year has outperformed the main market by 10% over the past six months, has outperformed the S&P 500 basically by double. And this happens from time to time, that one or the other one is outperforming. And if you have two things that are basically performing the same way over long periods of time, but perform differently at different times, that is a fundamental principle of diversification. You want to have both those things. So when one is high and the other one's low, you sell the high one, buy the low one. And as you go over time, that is how you get a bonus out of diversification. By holding more than one thing that is performing differently at different times. And so that's the draw or the attraction to this, at least for somebody like me. I don't anticipate or believe that small cap value is necessarily going to outperform the market. It might, but it doesn't need to from my perspective, as long as it over time performs at least as well as the market, and I think it will, then it's a good thing to hold with something like A S&P 500 or a VTSAX fund because they're well diversified.

Scott Trench (12:50)

Perfect.

Brandon (12:51)

And again, I just to hammer the point home though, that small cap value is special in the relative sense as an aggregation of sophisticated historical work, talking about correlations and Return profiles or relative to total market index funds or the s and P500. And that is why specifically we're talking about it today in there. And that's why we're not talking about industrials as a carve out. Right. Or mid caps or large cap value. We're talking about small cap value specifically because of its special dynamics there as heavily researched by legions of investor nerds over the years.

Frank Vasquez (13:28)

Yes. And it's still well accepted as a methodology. So if you listen to somebody like Liz Ann Saunders at Schwab, who's the head of the investing there, she talks a lot about factor investing and diversifying by factors. This whole area developed as a method for financial advisors going back to the 1990s. There was a fund company called Dimensional Fund Advisors who is sort of the goat as far as factor investing is concerned. They developed a whole series of funds and a methodology and they used to sell that through as like a proprietary thing through financial advisors. So you couldn't get access to their funds unless you hired a DFA financial advisor. And of course you'd have to pay for that and then you could get access to these kind of factor funds. That has changed in the past eight years. In particular, that instead of having to go through a DFA financial advisor to get access to this kind of investing, you can now get it pretty much for free because all of these things are now offered both in DDFA funds and ETF form. And then an offshoot of DFA is a company called Avantis, which is doing the same kinds of things, creating the same kinds of funds. So this has been going on for a very long time. And it used to be a proprietary thing, but the development of investing as a financial technology is how I view it.

Brandon (14:53)

Let's get into definitions here. Right. This is like the next layer, right? If you accept the argument that small cap value or factor investing and small cap value is, is should be one of the a key factor in your portfolio, then it's which fund? Or how do I define small cap value and invest according to that, that thesis. And this is where Paul Merriman kind of gave us a glimpse. Hey, there's, you know, the various two funds that both claim to be small cap value can perform wildly differently because of definitions in terms of how they enter, how they exit and what they define as small cap value. So can you help us understand the landscape here in defining small cap value and begin to help us narrow in on good versus bad?

Frank Vasquez (15:36)

It's interesting. So the reason Paul Merriman does what he does is his old firm, before he quit being a financial advisor, was a DFA Financial Services. And so he's basically taking those principles and now release them essentially to the public, if you will. Talking about funds in particular, okay, all of these funds are what you would call index funds. And let's go back and define what an index fund is because I think this is actually misunderstood by a great portion of the investing public. I think there's an idea because we've heard so much about the S&P 500 or a total market fund like BTSAX that that is an index fund and everything else is not an index fund. And that's not true what an index fund is, it's just a method of categorizing an index is a method of categorizing a group of stocks. It basically has some criteria and then looks at it and says, okay, is this stock in this index or not? And then the other categorization that an index fund does is, well, how are we going to weight these in a grouping? Are we going to have the index invest more in the biggest companies like an S&P 500 or VTSAX? Or are we going to wait it in some other way? And so all an index fund is doing is running an algorithm. It would be better to describe these as algorithmic funds because this is how it works. And what an index fund does is take an index, run a computer algorithm on it to take all the stocks and categorize them as to whether they should be in the index or not, and then how much should be the value of them. And they run this thing every few months and then they adjust the index fund by that. And so a common thing people talk about is it's, it's self cleansing like an easy bake oven or something. All that function is, is the function of the algorithm going back through and rerunning the algorithm and then rearranging the stocks based on what the landscape looks like today in terms of the algorithm. So all of these small cap value funds are index funds. And the way that they run them is they come up with an index saying okay, well how small is small enough? So, so it's literally this size company up to this size company and it actually does have a bottom cutoff because they're not including like penny stocks and micro cap things. So it's, it's from this big to this big. And no, I don't recall the exact numbers there. And then usually on the value side they are looking at these PE ratios or something. Like that, where they are saying, okay, this has a price to earnings ratio in this range and there are several other metrics you can use for that, but it's the same idea. So it's looking through all the stocks in the world and saying, okay. The algorithm looks at it and says, okay, does it fit in this index or not? Based on the computer program and then let's just arrange them. And then to manage it, it just runs it periodically and they just change the index. What's interesting here is there are different indexes for small cap value. In particular, there's three common ones plus what we're talking about from Avantis or dfa. Let's go back and compare this to the S&P 500 and a total market fund. The S&P 500 is an index that takes the top 500 size companies and just arranges them in order by how big they are. The total market fund, like a VTSX or VTI takes all the companies and does the same arrangement, but because of the weighting mechanism, they turn out to be almost the same thing. And although I know people say, well, the total market fund includes some smaller companies in it, it really doesn't include any significant amount of smaller companies in it. That's why vtsax and VOO perform almost the same way. If you ask me for cream in your coffee and I gave you one eyedropper, a cream, you would not consider that to be cream in the coffee. That is about how much cream or small cap that VTSAX has in it. It's not a meaningful amount. Mathematically, it's just not a meaningful amount. And that is why those funds are way up in those large cap and large cap growth boxes. They're way up high to the right, they're not down below. So if you want to add more cream, if you will, or more cowbell, as I like to say, sometimes you would go down to these small cap value funds.

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On Audible, you can level up your

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Mindy Jensen (23:21)

Audible.

Mindy Jensen (23:22)

There's more to imagine when you listen.

Brandon (23:25)

The real question I'm asking is not that we should whether we should add cream to the coffee or not, it's whether I should add half and half or hazelnut or whatever. Right? And that's what I'm trying to get to here. Right? We hear a VUV coming up all the time in these conversations and I can't explain why AVUV is different from another small cap value fund. I want a hazelnut coffee. That's the one that's going to taste really good. Why, why is AVUV hazelnut and another fund, you know, half and half.

Frank Vasquez (23:56)

It's all in the algorithm. And let me explain it because it's using a different, slightly different index. So let's, let's go to the classic three indexes that are used for small cap value. One is the Russell index. Now when the Russell index does small cap value, it is just looking at the size and just looking at the value growth component and it's the worst performer of the three common indices. The next one is the S&P 600 small cap value index that not not only looks at small in value, it also has a profitability filter on it. So it excludes essentially companies that have not made a profit in the last couple of quarters. And so that, that makes that index different from the Russell, which is the basic index. And that index tends to outperform because as you can imagine, if you remove a bunch of unprofitable companies from a group of companies, the remaining companies are going to perform better. Another indices, and the one that was originally used by Vanguard and in the FAMA French research is what is called the CRSP index. That one tends to be a little bit larger on the small and so it kind of bleeds almost up into the mid capsule. And so it does have a different kind of performance because it's more mid capish because they've changed the index as far as how big the companies are. That one also has a profitability filter on it. So those are the three basic indexes. Now what something like AVUV does is add more of a profitability or quality filter on top of this. So basically what it is doing is it is looking at these Small cap value companies and then getting rid of the worst ones, essentially. And since it's in index or algorithm does a better job in getting rid of these worst companies, it has a better performance or has had a better performance for the past 30 years. AVUV itself is not that old of a fund, but it is based on the same kind of algorithm as an older fund that goes back to the 1990s, DFSVX or something like that. But anyway, that one goes back to 1993. AVUV is a similar fund to that and that's why it seems to have these better performance characteristics, basically because it's excluding bad companies.

Mindy Jensen (26:18)

So back on episode 659, you walked me through setting up a risk parody portfolio. If you haven't watched that, go back and watch it. It's a really awesome episode episode. And you put me in AVUV and looking at my performance, that is the number two performer. Number one is gold. And I keep selling gold to fund my withdrawals because it keeps going up my world.

Frank Vasquez (26:46)

What do you think I've been doing over the past three or four years?

Mindy Jensen (26:48)

Gold is 19% of my portfolio, even though it's only supposed to be 16% of my portfolio. And I keep selling it and it just keeps going up. But we're not talking about gold. And I think gold is an outlier. I think this is a weird time. But AVUV is up 23% since I bought it.

Frank Vasquez (27:09)

Yeah.

Mindy Jensen (27:10)

Wow. Gold is up 50% since I bought it. Holy cow.

Frank Vasquez (27:14)

Yeah, wow.

Mindy Jensen (27:17)

That's not the column that I normally look at. So AVUV sounds like an actively managed fund, or at least more actively managed than a vtsax. So in the FI community, I keep hearing, don't invest. Invest in actively managed funds. Invest in passively managed funds because your expense ratio is lower. But if the AVUV fund is outperforming at such a rate, it seems like it's better to be in an actively managed fund sometimes. So how do you, like, tell the difference between when you should be in an actively managed fund and when you should be in a passively managed fund? For those of our listeners who are all index funds and they're like VTS X and forget about it?

Frank Vasquez (28:00)

Well, I think we need to get our definition straight because AVUV is not an actively managed fund.

Mindy Jensen (28:05)

Oh, it's not.

Brandon (28:06)

It is technically called an actively managed fund, but it's not. That's like a. Not a reasonable way to describe it. Right.

Frank Vasquez (28:11)

I would describe this as an algorithmic fund. Which is the way I would describe all index funds. There are no people sitting around a table picking these stocks. It's basically they've created an index of categorizations. They run a computer program on it and it picks the stocks for them. It works exactly like VTSAX or voo, just using a different index or categorization method. There's no magical people sitting there picking things and hoping to get lucky. And maybe they'll get lucky sometimes or not. I view them as an index fund. The distinction you really need to draw when you're looking at something like this is do we have people around a table picking stocks and putting them into this fund? That is an actively managed fund. That's human management. What we're talking about here is an algorithm run by a computer. It's the difference between somebody pushing a broom and a Roomba.

Mindy Jensen (29:04)

Well, that's a great analogy. I like that a lot. So what is the expense ratio for avuv? Do you know off the top of your head?

Frank Vasquez (29:11)

It's about 0.2 or 0.25 somewhere around there. And I would not compare that to something like vtsax. I would more compare it to those three basic small cap value funds that I talked about. So the Russell Iwn fund typically performs like 2% worse than something like AVUV. You are getting more bang for your buck. And this is why people were willing to pay financial advisors for this. It wasn't cheap to go to Paul Merriman's firm and get DFA funds back in the day. You are paying 1% to Paul Merriman's firm and you were paying more than that just to get access to this fund because it was that much better. So the way you should look at it is you don't have to pay over 1% to get access to a fund like this. You're now paying 0.2% and so you're getting even more than you would have back in 2010 when this became a popular thing amongst financial advisors.

Mindy Jensen (30:13)

I like that you explained that because you might not compare it this, this 0.2 or 0.25 to VTSAX, but I've got listeners who will. And I like that you explained you're getting a better return. Past performance is not indicative of future gains. This is not financial advice. Blah, blah, blah the disclaimers. But AVUV is my second highest performer. Now I'm going to go back into my other investments and look and see where I can maybe make some tweaks to include avuv. In other portfolios that I have, this is, it's the only one I have it in right now is my Frankenomics portfolio that you helped me set up.

Frank Vasquez (30:50)

I would not compare it for, for just six months, though. I would go back and you can, you can find that DFA small cap value fund that goes back to 1993. And if you compare that to the S&P 500 or VTS X, you'll see that that fund has outperformed since that time, actually since the beginning of the millennium. But they perform differently at different times. So if you look at, say, the past 10 or 15 years, the large cap funds have outperformed. They've done much better. Large cap growth's been the place to be. But if you go back to the early 2000s, those big companies, you know, crashed, you know, 40%, 50% between 2000 and 2003, and your small cap value companies were either going up or flat at that time.

Mindy Jensen (31:32)

Yeah, I remember that crash.

Frank Vasquez (31:33)

Same thing happened in 2022, I think AVUV was down 5% where the S&P 500 was down 25% or something like that. That's really what we're talking about here. We're not looking really for what do we think is going to outperform in the near future or something like that. What we really care about is is this going to perform at least as well as the rest of the stock market? And is it going to perform differently than something else I have? Because that's, that's the reason to hold more than one thing when it comes down to it, Frank, if I'm thinking

Brandon (32:03)

about small cap value, I can't help but kind of just conjecture like this is how I work in all of my life. What does fictional perfection potentially look like? And then how do I refine that hypothesis based on additional assumptions? Right? So if I'm thinking about a small cap value fund that to me intuitively would perform really well with reasonably stable returns, I'd think about first, of course, price to earnings ratios. I'd think about a certain size dynamic. I'd think about no extreme leverage. You can have a great price to earnings ratio, but if you have 20 times your earnings in debt, that's not a good sign. That's not really the thesis that we're betting on. If you have some kind of recurring revenue and your deferred revenue balance is falling dramatically or that is different than a company that is growing deferred revenue very rapidly, which is almost certain to hit the price to earnings Multiple downstream. Right. Growth profiles or the amount of capital intensity of the business is going to make a difference as well. Those are some of the dynamics we can argue about some of them. Maybe extreme leverage should be included because an average, it amplifies returns. Right. Like there's an argument there. But those are like the starting points I'd have for small cap value and what I. What I would be intuitively thinking I'm investing in. Can you reassure me that. That funds like an AVUV have some of those components. Components in place, even if they disagree with the premise potentially of some of the other ones that I just stated?

Frank Vasquez (33:26)

Yeah. I mean, and you can and should look at the components of whatever fund you're investing in. If you go to a place like Morningstar, it's the easiest place to get a feel. You put your fund in there and then click on the portfolio thing and it gives you all these data points, including the top 25 companies in the fund. And then it also gives you the sector breakouts. So you'll find that small cap value is a lot of financials in it, which are essentially small banks and insurance companies and things like that and other, you know, small manufacturers, industrial companies.

Brandon (33:58)

It's the kind of businesses that, you know, Cody Sanchez and Alex Hormozy talk about buying. Right. Like the H Vac business.

Frank Vasquez (34:04)

Yeah. Storage facilities and dry cleaner type.

Brandon (34:07)

Yeah. What they don't tell you about the H Vac in the garage door business is how hot and cold are up and down it can get. That's the kind of stuff that they're going for.

Frank Vasquez (34:13)

That's the sort of thing. And there are usually a couple of thousand companies in each one of these funds. So it's. They're really well diversified in some respects. They're much more better diversified than like a VTS X or S and P500 because they don't have the same kind of concentration. If you look at the top 25 companies in a small cap value fund, that's not going to be, you know, 80% of the fundamentals. Whereas if you look at VTSAX right now, I think the top 7 or 10 companies are like 40% of the fund. So it's actually more diversified when you get to these smaller funds than a large cap fund.

Mindy Jensen (34:52)

Can you explain why VTSAX has those top companies taking up 40% of the fund?

Frank Vasquez (34:58)

It's all in the algorithm. The algorithm used for vtsax tells you to take all the companies, but then arrange them by size and put more money in the biggest ones, the bigger they are, the more you own of it. As certain things become bigger, you buy more of it. In a sense, it's kind of a momentum fund, the better something is doing. That's why Nvidia went from a very small part of vtsax to now maybe it's the largest company in there. I don't know. It's close to it, but that's why you get this big concentration at the top. And that's also why all of these large cap funds tend to be the same. They're all investing in the same things and in large proportions. So whether you took AN S&P 500 fund or a large cap growth fund or VTSAX, there's a huge overlap there. They're basically investing largely in the same things, but it all has to do with the algorithm again, that is used to set up the fund.

Brandon (35:59)

This is kind of a tangent here, but one of the things that I've been very worried about you will be, I'm sure, push back on this, but I think that that concentration in the S&P 500 or in any, any major index around market cap weighting is especially dangerous right now because of the AI dynamics. When we talk about like for example, in 2026, there's an estimated $600 billion that's going to be invested in AI, specifically most of that in chips. Those chips depreciate, essentially become obsolete after about 18 to 24 months as the next generation cycles through. So that's capitalized and does not get, does not offset earnings for these companies in that year, and it's depreciated for five or six years. However, I believe that realistically 80 to 85% of that spend should be expensed in the, in the year that changes the forward price to earnings multiple or the past price to earnings multiple pretty dramatically. That single change. In terms of how you view how you think that accounting should treat AI investment in the markets here, this is a tangent again, but any reaction to that observation at a high level from your view in terms of how that would change or tweak or influence anything related to investing?

Frank Vasquez (37:14)

Well, I think if you look at the history of stock market and see how this goes, I mean, there are parallels. We've seen this kind of a movie before and it generally occurs when the stock market has been doing well over a long period of time. And that is often connected to some kind of new technology, whether it's railroads or the Internet or something else. What happens is the largest companies grow a lot, that people get excited about them, they put more into them. That increases the concentration at the upper ends of these index funds, these large cap index funds that are cap weighted. And so then sometimes it crashes. I mean, I don't know any disagreement with what you said technically, but I'm just telling you, sort of my view of this is, you know, this movie has happened before and we know, we know how it ends, but it doesn't necessarily end that way. But let's think about what if it does end badly? Because this happened in the early 1970s with something called the Nifty 50. Xerox, Polaroid. That was a time when everybody was saying these 50 companies are the, are the bee's knees. And just put your money into them. Don't worry about the valuations. You can't lose. And people did lose. The major consequence in the 1970s, the reason the stock market stayed down as long as it did was because these nifty 50 companies crashed and didn't recover. The same thing happened in the dot com era. So you had all of these companies. Unfortunately, the ones today, the difference people point out today is, well, at least they're profitable today. The ones that we're talking about in the 1990s weren't profitable and people were throwing all kinds of money into them. But you got the same results. These things grew up, they got really big and then there was a crash. In both cases, holding value stocks saved you. That's the lesson that if you held value stocks in the 1970s, small cap value or even large cap value, the small cap value companies went up every year from 1975 to 1987. While these large cap nifty 50s were, you know, down in the dumps and having all kinds of problems. Same thing happened in early 2000s. The total market indexes and the big tech companies and everything crashed. The Nasdaq went down 80% and the S&P 500 went down 40 or 50%. If you had value companies, they either didn't go down much or they actually went up. The lesson here is not to worry about trying to forecast this or is this like before? Is this not like before? I would rather say I don't know. But I won't put all my eggs in that basket. I will put some of my eggs in this value basket because I know that if that crashes, this one's probably going to do a lot better and I'm going to be better overall and I'll be a lot safer and happier.

Brandon (39:51)

I love it. I find this so fascinating because, you know, I just invested in The S&P 500 for, I don't know, 10, 12, 15 years as my only stock exposure essentially for the entirety of my accumulation phase, and only really thought about this towards the very end when I was transitioning, like, okay, I'm going to actually start living off a little bit of the portfolio that I've built here. Now, this discussion. I think if I had understood all of this when I started, I would have almost certainly mixed it up and had Some S&P 500, some value component to my growth portfolio and then maybe some international split between those two as well, between international blood and international value as well in there. But at least those two dynamics in that growth journey. And the irony there is that if I had, if I had known this and done that, I'd be less wealthy than I am today because small cap value underperformed the S&P 500 during that time horizon. Right. And that's the fun thing about investing here is like, the more you can know all this extra stuff get more sophisticated and then it's like even worse than the other alternatives because it's just so unpredictable.

Frank Vasquez (40:51)

You can only know in hindsight what was the best combination of funds to hold the last period. The key is, is just let's invest in low cost funds that are 100% in equities when we're accumulating and just keep putting in money and figure the rest of this out later because it doesn't matter as much until you're pulling money out. And you can't predict which combination of a few index funds is going to be better than another one in the next 10 or 20 years. You just can't. So the key there is just don't put your money in target date funds. They have bonds and other weird things in them. Just get your index funds and put your money in there and leave it alone. There is a convenience factor, Scott, in terms of, yeah, if you would have known this, you know, 20 years ago and you did half small cap value and half large cap growth or something like that, then it would have been easier to transition into a diversified retirement portfolio. But not doing that, it doesn't kill you that much. Particularly since if a lot of people have these things in their retirement accounts anyway and there's no taxes and you can just sell one thing and buy another one.

Scott Trench (41:56)

That's right.

Brandon (41:57)

If my gains had been smaller, I'd pay less taxes. Frank, you're absolutely right.

Mindy Jensen (42:00)

I need a DeLorean with a flux capacitor.

Brandon (42:03)

I guess this leads to the next question, Right? Like, you know, the coffee is, you know, the s and P500, right? That's your black coffee. You got to mix in the creamer, which is going to be your value. The right creamer makes a big difference. And if you're not putting hazelnut in your coffee, you're doing it wrong metaphorically here. So is that in play to the next discussion? Ought to be how we sweeten the coffee in terms of like, stevia or sugar or one of these, these sweetener alternatives. And that's where international comes in, or am I reaching way too far now into our coffee analogy?

Frank Vasquez (42:34)

You're probably reaching too far into the coffee.

Mindy Jensen (42:38)

My international has been good, but not as good as gold. So sweeten it with gold, Scott.

Frank Vasquez (42:43)

Well, gold is an international asset, too. That's the reason.

Mindy Jensen (42:46)

Oh, okay. I don't even think of it as domestic international. I'm, you know, Frank, Americans just think everything is about them.

Frank Vasquez (42:55)

It's a good thing my father's from another country.

Mindy Jensen (42:57)

The international that you put me in is also Avantis.

Frank Vasquez (43:01)

Yeah, well, they. That's because you can now buy small cap value in the international flavor or large cap growth in an international flavor. That's what's so nice and what has developed over the past eight years or not. These things were hard to find and they probably cost a lot more money than they do now. But now that we do have DFA and Avantis both putting out reasonably priced ETFs that cover these different asset classes or subclasses, it's really what they are. There's a lot more choices that we have. And, you know, 20 years ago, we didn't, we didn't have these choices. We just. You had to pay an advisor to get even close to access to them. So we need to take advantage of the modern iPhone here and go out there and take a look at these things. You know, and you mentioned Paul Merriman. He's got his little team there, and they actually review all of these funds and do a categorization and they publish it on their website saying these are the best in class. If you're looking for an international small cap value, try one of these. If you're looking for us small cap value or large cap value, try this one. In a sense, if you're just looking for a fund, they've done that work for you. That's where I would go. If somebody says, I want a mid cap growth fund. And I'd go in there and say which ones look good? Because they'll List all the basic index funds, plus some of these more advanced things.

Brandon (44:23)

I want to summarize kind of where I'm at here. Right. We have great research that discusses the advantages of splitting a portfolio out like this and in essence weighting much more heavily than a broad based market cap weighted index fund would to small cap value. So that's the first pillar here. The second is that there are varying degrees of complexity about how to weight to small cap value. And we have from the very simplistic in the Russell 2000 or the S&P 600 Small Cap Index, and to increasing levels of sophistication with some of these more algorithmic funds here. I still don't think we know exactly what the thesis is for AVUV specifically. There may even be a proprietary element to it. It was not available in a way I could understand very clearly what those hard rules are on the Morningstar website. I did actually look that up before our call here, and I can't really find. I still can't explain why it's different than a very close peer fundamentally, even though I know I have seen Paul Merriman's site say, hey, here's the edge here. It's very close between these two, but we prefer this one for this reason. And so I think that's kind of the next layer of depth I would love to get to over time is like, no, no, actually, specifically, what is it that AVUV is doing? I think that's the third leg of this conversation or this study that I'll have to do in the coming weeks here to say, no, that's exactly what. These are the rules that you're investing in. And here's where you can debate with them. I think reasonable people can disagree on where certain cutoffs should be in value, but those will matter over time. Those will separate performance across these funds in ways you probably can't predict. Is that the right takeaway to have from today's conversation, Frank?

Frank Vasquez (46:05)

Well, if you want to do that research, you can do it. And that's what Paul Merriman, his team have done. If you go to someplace like Portfolio Visualizer, there is an analyzer that will break funds down by how big or small they are, how valuey they are, how much momentum they have in them. They will basically categorize them by factor. And so you can look and see which of the small cap value funds is the most value or the smallest or has these other characteristics. And so you can do that research and see some of that. What you can't See is the kind of profitability or quality, quality factor that AVUV or DFA is actually applying because that is the. Their proprietary way of constructing the fund. But they do describe that in the text. If you look at the prospectus. Basically we're taking the basic small cap value and then applying these other filters to get essentially get rid of bad companies is basically what's going on there. So it's not, it's not magical, but it's not. No, you cannot find the AV UV index posted somewhere.

Brandon (47:10)

Fair enough. Yeah.

Frank Vasquez (47:11)

Because then Vanguard could create one.

Brandon (47:13)

Well, Frank, this has been absolutely phenomenal and very educational as always here. I have one last question before we go, which is how do you like your coffee?

Frank Vasquez (47:21)

Black.

Brandon (47:22)

Me too. Yeah, same here.

Mindy Jensen (47:25)

Wait, I thought you liked it with Hazel. That I was gonna say. Scott, you're doing it right. You're both doing it wrong.

Scott Trench (47:31)

Once in a blue moon.

Brandon (47:33)

I'll put some hazelnut creamer in there. But no, I will always drink it black.

Frank Vasquez (47:36)

I will have a cappuccino like when I'm on vacation or something. But on the day to day basis, you know, I'm a black coffee chugger.

Brandon (47:43)

I do put a little bit of cinnamon on the top of the beans and that adds a nice little spice to the coffee. Just a little bit. That's a pretty nice touch if you've never tried.

Frank Vasquez (47:50)

That sounds wonderful.

Brandon (47:52)

Well, hey, thank you so much for coming on today, coming back on again, Frank, really appreciate it. And yeah, can you remind everybody where people can find out more about you?

Frank Vasquez (48:01)

Oh, yes. I run a podcast called Risk Parody Radio where all finer podcasts are sold. Plus we have a website and I had a volunteer nicely fix the website so it's now actually searchable for stuff like this. If you want to go in there and find. Because there's 500 episodes or almost 500 episodes of the podcast I do want to plug. My podcast is a retirement hobby and it's not for profit, but we do raise money for charities and we usually raise money for my charity, which is called the Father McKenna Center. But starting tomorrow and the next couple of months, we are raising money for my wife's charity because she reads the emails and she works for Fairfax CASA, which is court appointed Special advocates. So these are volunteers who assist with children who have been removed from the home and they're in a foster situation until they go through the court process and figure out whether they're going back to their parents or getting adopted or something else like that. That.

Brandon (48:56)

What are the two web URLs or best ways that people can remember to donate to one or both of these charities.

Frank Vasquez (49:02)

I put this in the show notes at my podcast and it's going to be on the support page. I think that's the easiest place for somebody to look. But it's Fairfax County Court appointed special advocates. That's a mouthful in Virginia. Is is hers and the Father McKenna Center McKenna in Washington, D.C. is the is the one that I'm affiliated with.

Brandon (49:25)

Awesome. People should go and check out your show. If for some, if many people will not, maybe will not take all that step. We'll link to both of those in the show notes here and you can Google them. Just so you know that you're aware, even if you don't actually go on to listen to Frank's show, which you should, to find those charities, it's great work that you're doing there and thank you for all you're doing for the personal finance community and for the folks in your community locally.

Frank Vasquez (49:48)

Well, thank you. I enjoy this, Frank.

Mindy Jensen (49:51)

It was great to talk to you. Thank you so much for your time and we'll talk to you soon.

Frank Vasquez (49:54)

Okay, great.

Mindy Jensen (49:55)

All right, Scott, that was Frank Vasquez. And I mean, what do we say to follow up Frank? He knows everything. Go listen to his podcast and contribute to his charities.

Brandon (50:04)

I think the answer is that Frank is a real master on these macro allocation theory items here and, you know, alongside folks like Paul Merriman. And we still don't really know what it is specifically that differentiates AVUV from its peer set and its alternatives. And there's a little bit of a trust implication in there if that's a specific etf. So I don't think we can specifically recommend avuv, and I think we can only specifically recommend going down this rabbit hole of understanding why folks argue for small cap value and then how to define it and how to add it to your portfolio, the reasons it makes sense to you. So that's a rabbit hole I want to continue to go down. I am a nerd. I want to understand at the mechanical level everything that I'm putting my money into. And I still don't right now when it comes to avuv, even if I to some degree implicitly trust the research that backs small cap value in the first place.

Mindy Jensen (50:58)

I have AVUV in one of my portfolios, in my Frankenomics portfolio, and I like the way it's been performing. So, yeah, it's time for a deeper dive into past performance, which is not indicative of future gain, blah, blah, blah. But past performance is a good place to look. It's a good place to start. So I am going to dive down that rabbit hole and maybe start making some more allocations. But, yes, this is not financial advice. This is just information, so you can do with it as you please. Thank you for listening. All right, Scott, should we get out of here?

Brandon (51:30)

Let's do it.

Mindy Jensen (51:31)

That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen, saying see ya chia.

Brandon (51:37)

See you later. Latte. See a latte.

Frank Vasquez (51:40)

No.

Mindy Jensen (51:41)

See a chia. That was really cute. Yes. But we'll also see a latte if you put hazelnut in it. Scott, if you don't put hazelnut in

Mindy Jensen (51:48)

it, you're just wrong.

Brandon (51:49)

That's right.