Small Cap Value Fund Selection: Index vs Avantis/DFA

In this episode we answer emails from Roman, Andrew and Iain.  We discuss the plusses and minuses of leverage, volatility drag, and how leverage interacts with diversification and withdrawals, general observation on tax optimization via account buckets, small cap value index funds and Avantis/DFA merits, and modelling annuities versus mandatory versus discretionary spending in retirement.

LInks:

Father McKenna Center Donation Page:  Donate - Father McKenna Center

Ben Felix Leverage Video:  Investing With Leverage (Borrowing to Invest, Leveraged ETFs)

Leveraged ETFs Paper:  Double-Digit Numerics - Articles - The Big Myth about Leveraged ETFs

Optimized Portfolios Article/Website:  How To Beat the Market Using Leverage and Index Investing

Jim Sandidge Chaos Theory Applied to Drawdowns:  RMJ081-ChaosAndRetirementSecurity.pdf

"Buffet's Alpha" Paper:  Full article: Buffett’s Alpha

New Tax Planning In Early Retirement Book:  Amazon.com: Tax Planning To and Through Early Retirement: 9798999841599: Garrett, Cody, Mullaney, Sean: Books

Merriman Best IN Class ETF Selections:  Best ETFs 2025 | Merriman Financial Education Foundation

Breathless Unedited AI-Bot Summary:

Ever wonder why leverage looks brilliant during bull markets but feels brutal the moment you start withdrawing cash? We break down the promise and pitfalls of adding leverage to diversified, risk parity-style portfolios, then show how the math of volatility drag and sequence risk can quietly erode safe withdrawal rates. It’s an honest tour of what works in accumulation, what breaks in retirement, and how to engineer a calmer path without surrendering all upside.

We start with the straight talk: leverage and concentration are the two proven routes to outperformance, but only one of them can be paired safely with broad diversification. From hedge fund history to the “Aggressive 50/50” experiment, you’ll hear why high-octane blends can top the charts and then stall after deep losses, especially when distributions force selling at the worst times. We contrast that with return stacking and measured leverage, which aim for equity-like returns with better risk control, and we share practical tools—rebalancing discipline, cash buffers, and dynamic spending bands—to keep a drawdown portfolio intact.

Taxes matter just as much as tickers. We walk through Roth vs traditional contributions, why present marginal rates and future flexibility drive the choice, and how to place bonds smartly across tax buckets. On the equity side, we revisit small cap value: why classic S&P 600 value exposure is solid, and how AVUV and DFA’s profitability filters can sharpen the factor without turning it into active guesswork. Then we turn to spending: build the plan around real expenses, not theoretical annuities. Set a durable floor for essentials, keep a flexible layer for the fun stuff, and consider partial annuitization later in life if longevity and peace of mind are worth the trade.

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