Total Stock Index + Small Cap?

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Total Stock Index + Small Cap?

Postby gane » Thu Feb 07, 2013 4:05 pm

I'm 25. I just opened my first fund through vanguard for my ROTH IRA. I decided to go with the Vanguard total stock market index investor shares. I'd like a little more "reward" that could be more aggressive/risky. I keep reading how popular the TOTAL STOCK index/ total international index/ bonds lazy portoflio is so I started by opening the total market index first. Would it be silly to also open up the small cap index investor shares for some tilt because of overlapping funds? What can a younger guy like myself do to make a total stock/international stock/bonds portfolio more open to aggressive gains at the trade off of more risk? REIT?Thanks guys!
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Re: Total Stock Index + Small Cap?

Postby William4u » Thu Feb 07, 2013 4:26 pm

There is quite a debate among Bogleheads over whether to tilt small value or not. The consensus is that you are probably fine either way; both "Total Market" and "Small Value Tilt" strategies are considered good and close enough to "Bogleish."

"The enemy of a good plan is the quest for the perfect plan." No need to overthink this one. Just flip a coin, since they are both good options.
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Re: Total Stock Index + Small Cap?

Postby Taylor Larimore » Thu Feb 07, 2013 4:28 pm

gane:

If this Roth IRA is your first investment, consider exchanging your Total Stock Market Index Fund to a much more diversified Target Retirement Fund.

https://personal.vanguard.com/us/funds/ ... rementList

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Total Stock Index + Small Cap?

Postby Jay69 » Thu Feb 07, 2013 4:46 pm

If I were to start over at 25 I would either just use a single all-in-one fund or the following.

Buy the total US fund until you hit the Admiral $10,000 share class, then the same for International then by that time you may have a feel for what type of risk you care for and start adding some bonds and some time thinking about your AA..

Your young and like to tinker is my guess, I know I did, you have time to learn the ropes with out to much skin in the game.

I do think the all-in-one fund is a great choice but I think you miss some of the learning curve. The grass is always greener on the other side you know!

Spend 5% of your time working on your AA, 45% of your time working up a plan to work on your savings rate, the last 50% of your time enjoying life.
"Out of clutter, find simplicity” Albert Einstein
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Re: Total Stock Index + Small Cap?

Postby Khanmots » Thu Feb 07, 2013 4:49 pm

Congrats on starting to save early! Especially congrats on deciding to educate yourself on the subject, I really wish I'd done so at your age! :beer

That said, the first thing you should do is come up with a decision of where you want the basic parts of your portfolio to be in the long run. This will require you to come up with an idea of what your risk tolerance is. Since it's almost expected that you'll see stocks drop in value by 50% at least once in your investing career one way to try to get an idea on your risk tolerance is try to imagine what it'd be like to watch a $200k portfolio that was entirely stocks drop to $180k, then to $160k, then to $150k, then to $130k, then to $110k, then to $100k then to $80k, etc.... when do you think you would be scared that it's never going to drop dropping and be seriously tempted to sell it all and run? If it'd be at $150k then a 50/50 equity/bond split would be as much risk as you'd want to take. (if 50% of the portfolio falls 50%, your portfolio is left at 75% of total) If at $100k or less you might be ok with 100%. This isn't a precise thought experiment by any means, but it may help.

Once you've decided on your equity/fixed-income split based on both your risk tolerance and your need to take the risk.... then you start thinking about things such as how much do I have in domestic equities vs international.

I'd suggest taking some time and settling on a stock/bond and domestic/foreign allocations, i.e., what you'll need for a 3-fund. There's no rush on this, a month or 6 now isn't much of anything given the decades ahead of you. Feel free to keep throwing savings into the total stock market index (or maybe switch to a total retirement) during this time; it won't hurt anything :) I'd almost say stick with total stock as if you get to see a drop or two of different sizes with it it may help give a feeling for your risk tolerance. A graph of the stock market can feel different when it's suddenly a graph of your money :twisted:

Now, you mention small cap; this is getting into Fama and French's 3-factor model of investing. It's talked about a lot around here with people on all sides. I wouldn't decide to tilt to small or value until you've done a lot of reading on the subject. Same thing with REITs, read up before you decide on them. I didn't do as much reading as I should have and now find myself second guessing myself on my decision regarding REITs. :oops:

Personally when I started I spent a good month poking at the stock/bond domestic/international thing and running example numbers through historical regressions with different stock/bond mixes and reading up on stuff before I felt I had a decent idea of where I wanted to be with just these things. I then, because I like complexity and making things hard on myself, decided I wanted to read up on small and value factors and slice and dice and tilt and create a portfolio that requires a large spreadsheet to really track things. That took me another 6 months of glorious fun to get where I felt it was implementable.

Point is, there's no need to rush into everything (or even rush into anything). If you go with a nice simple 3-fund (or heck, even 1-fund total-retirement) portfolio now, it's easy to in a year or three decide that you now understand small and value factors and the correlation arguement for REITs or whatnot and that you want to add something to the portfolio (it's also easier to add tilts when you have more accumulated because of fund minimums). It's far more painful to struggle with a more complex portfolio for those initial years and then decide that now that you really understand more about these things that you don't want anything to do with them, and you're beating yourself up for getting in the position in the first place, and... just bleh.

So short version: Start with the basics, it's easy to add complexity later if you really feel you want it after you've had a chance to learn and experience more.
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Re: Total Stock Index + Small Cap?

Postby dbr » Thu Feb 07, 2013 4:56 pm

gane wrote:I'm 25. I just opened my first fund through vanguard for my ROTH IRA. I decided to go with the Vanguard total stock market index investor shares. I'd like a little more "reward" that could be more aggressive/risky. I keep reading how popular the TOTAL STOCK index/ total international index/ bonds lazy portoflio is so I started by opening the total market index first. Would it be silly to also open up the small cap index investor shares for some tilt because of overlapping funds? What can a younger guy like myself do to make a total stock/international stock/bonds portfolio more open to aggressive gains at the trade off of more risk? REIT?Thanks guys!


The basic answer is more stocks and fewer bonds. It is an active debate whether going so far as 100% stocks is wise. Very few people would suggest taking a 100% stock portfolio and adding risk with small cap and value tilts. A lot of people like the idea of increasing stock risk with small and value tilt and perhaps increasing bonds to keep risk within bounds.

Also, for the young investor, initial growth of wealth has more to do with savings than with return.
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Re: Total Stock Index + Small Cap?

Postby Khanmots » Thu Feb 07, 2013 5:04 pm

dbr wrote:The basic answer is more stocks and fewer bonds. It is an active debate whether going so far as 100% stocks is wise. Very few people would suggest taking a 100% stock portfolio and adding risk with small cap and value tilts. A lot of people like the idea of increasing stock risk with small and value tilt and perhaps increasing bonds to keep risk within bounds.

I'll chime in that I'm crazy enough to consider this, but haven't done this yet, and would not advise anyone else to do it. I'm a *very* introspective person that is very mathematically and logic driven and am able to deal with playing the expected return odds and losing without getting upset. I'm not yet convinced that even with this to help me that I'd have the fortitude to stick with the portfolio through thick and thin like it'd require. It's a portfolio that it would be very easy to panic and sell out with.

dbr wrote:Also, for the young investor, initial growth of wealth has more to do with savings than with return.

And very much this. Even with the great equity returns we had last year, my contributions outweighed what I earned. Savings are very important early... even if it's not into the "perfect" allocation (which sadly will remain forever unknown)
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Re: Total Stock Index + Small Cap?

Postby peppers » Thu Feb 07, 2013 7:04 pm

To be perfectly honest, if Taylor's 3 Funds had been around 40 years ago, that's the way I would have gone. Contribute regularly and get on with life.
"..the cavalry ain't comin' kid, you're on your own..."
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Re: Total Stock Index + Small Cap?

Postby gane » Fri Feb 08, 2013 9:27 am

Thanks all! It seems the more I read the more it confirms that the 3 fund portfolio (total stock/international/bond) is the way to go. I guess I just like reading/learning about all this investing stuff and want to spice it up beyond that!
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Re: Total Stock Index + Small Cap?

Postby Khanmots » Fri Feb 08, 2013 10:26 am

gane wrote:Thanks all! It seems the more I read the more it confirms that the 3 fund portfolio (total stock/international/bond) is the way to go. I guess I just like reading/learning about all this investing stuff and want to spice it up beyond that!

Keep on reading and learning, personally I find it kind of fun and interesting. And... if after you feel you're well edumacated and really understand things that a tilt is appropriate, it's not a mistake to add one on later.

The thing you want to avoid is adding a tilt then reading more and removing it then reading more and adding it then having the tilt not live up to expectations over the next couple years so you then remove it, then it starts doing well so you add it out of regret, then then then... :mrgreen: You want to make sure that you understand the theory and the counter-arguments and are well and truly set before you implement a tilt.

My personal path was to start with some complexity in tilts, but then I wound up changing it after 3 months of additional learning which resulted in taxes and losses I can't ever claim as losses to help save on taxes (wash sale between taxable and Roth) and all sorts of spreadsheet fun that I could have avoided if I'd just gone simple at first and then morphed as I learned more. Learn from my pain ;)

Now, I'm still considering some more tweaks, (but much smaller than the ones I made 3 months into doing it on my own) but as I'm at 90% of "perfect", it's good enough and I'm taking a long time considering them before doing anything and making sure that I really am comfortable with the idea as a forever change.
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Re: Total Stock Index + Small Cap?

Postby nydad » Fri Feb 08, 2013 11:28 am

There is a lot of debate about tilting. There is some evidence that in the past, tilting to small and value would have led to better returns. However, we don't know if tilting will still do so, and it adds complexity and cost. (disclaimer: I tilt...)
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Re: Total Stock Index + Small Cap?

Postby Timcom99 » Fri Feb 08, 2013 10:40 pm

gane wrote:I'm 25. I just opened my first fund through vanguard for my ROTH IRA. I decided to go with the Vanguard total stock market index investor shares. I'd like a little more "reward" that could be more aggressive/risky. I keep reading how popular the TOTAL STOCK index/ total international index/ bonds lazy portoflio is so I started by opening the total market index first. Would it be silly to also open up the small cap index investor shares for some tilt because of overlapping funds? What can a younger guy like myself do to make a total stock/international stock/bonds portfolio more open to aggressive gains at the trade off of more risk? REIT?Thanks guys!



Become an Admiral in your 3 funds 1) Total Stock 2) Total Bonds 3) Total International first. This will give you some experience. Then you can decide if you want to Tilt small or not at all and just keep market weight which is what the Total Stock and Total International contain.
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Re: Total Stock Index + Small Cap?

Postby pascalwager » Sat Feb 09, 2013 12:24 am

If you work for a small company, you might not want to add more small company risk, beyond the market amount (9% of TSM), with a small cap fund.

If you work for a large growth company, you might want to add small cap or small cap value.

If you work for a large value company, you might want to add small cap.
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