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Need help replicating Total Stock Market Index with my 401(k) funds
Old 03-08-2008, 01:00 PM   #1
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Need help replicating Total Stock Market Index with my 401(k) funds

Hi all,
I'm wanting to replicate the Morningstar 9-box style grid of the Vanguard Total Stock Market Index Fund (VTSMX) using a handful of funds in my 401(k). The funds I want to use are:

S&P 500 Index Fund, Expense Ratio 0.005%, use VFIAX as a proxy
Hartford MidCap Fund HLS IA, ER 0.68%, HIMCX
American Cent Small Cap Val Instl CL, ER 1.05%, ACVIX
T. Rowe Price Instl Small-Cap Stock, ER 0.69%, TRSSX

Todays Morningstar snapshot of VTSMX looks like this:

VTSMX - Vanguard Total Stock Market
22 25 26
6 7 6
4 2 2

I've been able to get the following grid with the following allocation to the funds by manually using the Morningstar Instant X-ray over and over (very tedious):

22 25 26
6 7 6
4 3 2

As you can see I've got a match to VTSMX except for the small core percentage (no matter what I try even using 0.1% increments I can't seem to get that dialed in!). Also, I was hoping to match it using only 2-3 funds and to not have to use ACVIX due to the high 1.05% ER.

Anybody out there better at this than me? (I'm sure there is:confused LOL!? Can you find any simpler and/or cheaper (i.e. lower ER) way to match VTSMX using the funds listed above?

Are there any tools online (besides X-ray) that I could plug my funds into and it would automatically spit out the closest allocation match to VTSMX, without it being such a manual process?

Any help appreciated. Thanks.

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Old 03-08-2008, 03:02 PM   #2
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Honestly I wouldn't obsess about trying to replicate VTSM down to the last percent. It does shift slightly over time as small or large cap stocks become more less in favor.

Don't know about Hartford fund but the other ones are quite reasonable mutual funds especially since you are not paying a load for the American Century ones. Your blended ER is .16% which is quite low.

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Old 03-08-2008, 04:14 PM   #3
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Go with that low fee S&P fund. There isn't that much difference between the S&P and the Total Stock Market Index. The low fee more than makes up any difference.
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Old 03-08-2008, 04:50 PM   #4
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There's about a 90-95% correlation between an S&P index fund and the typical total market fund. As a result, the S&P index fund is a pretty good proxy for the total market fund.

Personally, I think if you put 90% into an S&P index fund and 10% into the TRP small cap fund, you'd come close to a "total market" fund with an expense ratio of (0.9 * 0.05%) + (0.1 + 0.69%) = 0.114%.
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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Old 03-09-2008, 07:23 AM   #5
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Thanks. Bogle makes the point in his Common Sense book that "if, for example, large-cap and small-cap stocks do not revert to the market mean over the next 10 to 20 years, an investor has to guess which one of the two is more likely to provide superior returns." This is why I'm wanting to include the extended market rather than just the S&P500.
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Old 03-10-2008, 12:44 PM   #6
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The mid cap fund might skew things more than you realize, because most mid cap funds will hold a small percent of large cap and small percent of small caps as the market cap of their holdings change. I have read that indexing purists sometimes do not recognize mid caps because they do skew things as dude and ziggy pointed out (removing mid cap fund makes mimicing the market easier).

If TSM is 73% large cap, 19% mid cap and 8% small cap, anything within 5% of these holdings will be giving you close to market returns anyway.

You would need to underweight large caps by around 15-25% to change behavior relative to TSM, IMO. Meaning take 15-25% away from large cap and put in mid/small to see a change in behavior- and even then the behavior would be similar, just not as close.

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