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Market Index Confusion
Old 03-18-2006, 08:51 AM   #1
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Market Index Confusion

Okay, let me rephrase since my previous poor question didn't seem to generate an answer...

Does a Total Market Index Fund give enough exposure to mid/small cap stocks (in terms of AA) or is it too weighted by the large cap portion since they are generally categorized as Large Cap Blend?*

I would think you would need to augment with a mid/small cap position.* Is this correct?

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Re: Market Index Confusion
Old 03-18-2006, 12:19 PM   #2
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Re: Market Index Confusion

Edited...hopefully a more clear question.
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Re: Market Index Confusion
Old 03-18-2006, 12:26 PM   #3
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Re: Market Index Confusion

Oh, I get it now!

Actually your original wording was probably just fine but everyone was sleeping in. You're posting on a weekend and this board sees by far its greatest activity on workdays.
Quote:
Originally Posted by AV8
Does a Total Market Index Fund give enough exposure to mid/small cap stocks (in terms of AA) or is it too weighted by the large cap portion since they are generally categorized as Large Cap Blend?*
I would think you would need to augment with a mid/small cap position.* Is this correct?
No, yes, and yes.

Compare the returns of the S&P1500 (S&P's version of the total stock market) against the S&P500, the S&P400 (midcap), and the S&P600 (smallcap).* You can also do the comparison a second time using only the value components of those indices.* You'll probably be happier if you boost the 400 & 600 in your AA, and if you retain some of the 500 then you'll dampen the volatility.

However the last three years' volatility of the S&P600 value component (IJS) has made us very happy ERs.* Even the small-cap growth (IJT) has been pretty good, Bernstein's historical data notwithstanding.* Maybe you don't want any of the S&P500 at all.

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Re: Market Index Confusion
Old 03-18-2006, 12:27 PM   #4
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Re: Market Index Confusion

I've always felt that the "Total Market" portfolios were too heavily weighted toward the large caps. I think folks like Bogle would argue that the "Total Market" portfolio is the market and by adding small & mid-cap exposures you are really making a bet that these sectors will "out perform the market." I guess that's true but I prefer the diversification of several market slices (I keep an S&P 500 index, mid-cap index, and small-cap index rather than the Total Market portfolio). I also think having multiple funds within the "Total Market" has advantages when it comes to rebalancing.


As Nords points out, small caps have historically outperformed large caps. So increasing the allocation to smaller companies may increase total returns. As always, though, past performance is not indicative of future results.
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Re: Market Index Confusion
Old 03-18-2006, 12:30 PM   #5
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Re: Market Index Confusion

Quote:
Originally Posted by 3 Yrs to Go
... and by adding small & mid-cap exposures you are really making a bet that these sectors will "out perform the market."
Only over the last century of data.

Seems like a pretty good bet to me, as long as you can live with the volatility.
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Re: Market Index Confusion
Old 03-18-2006, 12:48 PM   #6
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Re: Market Index Confusion

Okay, got it.* Thanks 3-Yrs and Nords.

Quote:
...but everyone was sleeping in
I have to laugh at that...with a 5, 3 and 1 year old we don't do a lot of sleeping in around here!* Sometimes I forget what that was like.* Of course, I wouldn't ever go back.* Lets see...based on the 1 year old -- In just a short 17 (or so) more years we'll be able to sleep in and nap to our hearts content, all while comfortably FIRE'd.

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Re: Market Index Confusion
Old 03-18-2006, 12:58 PM   #7
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Re: Market Index Confusion

Depending on your desired asset allocation, a total market index may very well represent less small cap exposure than you are seeking. Since these are cap weighted, the large cap stocks in these indexes overwhelm the mid and small caps. I think I remember seeing a statistic that the S&P 500 represent something like 80% of the total market cap. I hold several small cap funds in addition to a core holding in the Vanguard Total Market Index.

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