This Afford Anything Podcast episode features a debate between Paul Merriman and Dr. Karsten Jeske on the merits of including small-cap value stocks in a portfolio versus a simpler "VTSAX and chill" approach (investing solely in a total stock market index fund). The debate explores historical performance data, risk-adjusted returns, diversification strategies, and the role of investor faith versus scientific evidence in investment decisions. The significant potential impact (millions of dollars over time) of different portfolio strategies on retirement is highlighted.
Divergent Views on Small-Cap Value: Merriman advocates for including small-cap value stocks due to their historical premium returns, emphasizing the long-term benefits for young investors. Jeske argues that small-cap value's outperformance has diminished since 2006, suggesting that a broad market index fund offers sufficient diversification and less volatility.
Historical Performance Data: While small-cap value significantly outperformed the market for many years, its recent underperformance since 2006 is a key point of contention. Both sides acknowledge that past performance doesn't guarantee future results.
Risk and Volatility: Jeske emphasizes that adding small-cap value increases portfolio volatility. Merriman counters that the increased volatility is compensated for by higher returns, and that the combined strategy may result in less downside risk over the long term compared to index-only investments.
Diversification Strategies: The debate examines different perspectives on diversification. Jeske favors broad index funds, while Merriman argues for a combination of large-cap blend and small-cap value to provide more robust diversification and reduce overall portfolio risk.
Importance of Investor Time Horizon and Risk Tolerance: The impact of investor age and risk tolerance on investment decisions is crucial. Young investors with a long time
