Are small and mid caps necessary?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
mrehal
Posts: 136
Joined: Thu Apr 10, 2014 7:15 pm

Are small and mid caps necessary?

Post by mrehal »

Hello all. I've posted once or twice before and continue to get excellent info from everyone.
I wanted a few opinions on my portfolio. My 401k is fairly new (2+ months) and fairly small (<$2000). I'm 27 and in the early accumulation stages.
I'm 92% stocks and 8% bonds.

My funds in my Schwab 401k are as follows:
69% SWPPX Schwab S+P 500 index fund, ER 0.09%
23% REREX American Funds EuroPacific GR 4 ER 0.85%
8% SRBFX Columbia Intermediate Bond Z ER 0.62%

As the title suggests, I have absolutely 0 small cap exposure and little mid cap. Is exposure to these caps really important to have? Through my readings on here some people favor mid over small with just as good a return and less volatility.
I have some good international exposure in REREX and it also has a decent amount of emerging market exposure (~11% or so), but again, 0 small caps.
I also have the option of PCRA through Schwab, where my company does not charge a fee for its use. Would that be better to use to get better funds? Schwab has some very good, cheap index funds and seems to have some very good, low cost ETFs as well.

I appreciate any input. Thanks :D
chaz
Posts: 13604
Joined: Tue Feb 27, 2007 1:44 pm

Re: Are small and mid caps necessary?

Post by chaz »

I don't tilt. A 3 index fund portfolio. Keep it simple.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
livesoft
Posts: 86079
Joined: Thu Mar 01, 2007 7:00 pm

Re: Are small and mid caps necessary?

Post by livesoft »

It depends on whether you wish to be more diversified and have a better chance of higher performance. If either of those wishes are true, then small and mid-caps are necessary.
Wiki This signature message sponsored by sscritic: Learn to fish.
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Are small and mid caps necessary?

Post by longinvest »

Short answer: no

Longer answer:

The Total Stock Market index fund already contains everything in it (over 3500 stocks), including small and mid caps.

In addition, there's the fundamental law of investor returns:

Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors. See: http://www.vanguard.com/bogle_site/sp20060101.htm and http://www.stanford.edu/~wfsharpe/art/active/active.htm.

Therefore, one could get lucky and select a strategy that makes more than the overall market, but that means that someone else has to select another strategy that makes less than the market.


It is your money. Do you consider yourself lucky? If so, you can bet on small and mid caps, on value stocks, or on dividend stocks. Me, I prefer to stick to getting guaranteed market returns with a simple, boring, yet tax-efficient Three Fund Portfolio.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
rkhusky
Posts: 17766
Joined: Thu Aug 18, 2011 8:09 pm

Re: Are small and mid caps necessary?

Post by rkhusky »

I would not call ER's of 0.85% and 0.62% low. You could supplement your 401K with an IRA to get more-diversified lower-cost funds. But make sure you are getting the full company match in the 401K.
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Are small and mid caps necessary?

Post by Rodc »

Necessary? No.

Might at some point be somewhat useful if you can add them at low cost.

Allocation really only matters once you have a substantial amount invested. Right now it does not matter much at all. I note that if you manage to boost your portfolio return by 1% (i.e. say from 8% to 9%), about what you might hope, on $2000 to that is an extra return of less than $2 a month. Compared to what you are investing each month that just does not matter.

Now what matters is you keep adding to your investments and keep up your job skills.

Best of luck.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Are small and mid caps necessary?

Post by steve_14 »

IMO bonds and international aren't necessary until you have $200K+ saved. Small/mid caps are never necessary, but if I could add them at no additional cost, I'd take them (and in fact i do, in my TSM fund).
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Are small and mid caps necessary?

Post by longinvest »

steve_14 wrote:IMO bonds and international aren't necessary until you have $200K+ saved. Small/mid caps are never necessary, but if I could add them at no additional cost, I'd take them (and in fact i do, in my TSM fund).
Of course, Steve's opinions about bonds are his own.

The Bogleheads Investment Philosophy is more balanced. It suggests that new investors that have not experienced a major market downturn can easily underestimate risk and overestimate their tolerance for risk, and should, therefore, include bonds in their portfolio.

Bonds reduce the risk in a portfolio and increase its risk-adjusted returns. How much bonds? That's the basic question of asset allocation. Before you decide, you first need to balance your ability, willingness, and need to take risk.

Our mentor, John Bogle, recommends "roughly your age in bonds" as a crude starting point to be adjusted for your circumstances.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Longtimelurker
Posts: 471
Joined: Fri Dec 13, 2013 7:23 am

Re: Are small and mid caps necessary?

Post by Longtimelurker »

if i were you, i would:

- be 100% in the low cost S&P 500 fund up to company match
- build an emergency fund with a savings account and I-bonds equal to 6-months expenses
- come back to the forum for advice when done
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
Topic Author
mrehal
Posts: 136
Joined: Thu Apr 10, 2014 7:15 pm

Re: Are small and mid caps necessary?

Post by mrehal »

Thanks everyone. I am currently in my 401k planning to get up to the company match. My emergency fund is in progress right now. I assumed the 3 funds I have selected are close to the 3 Fund Portfolio spoken about here. I don't have access to a Total Stock Fund or Total International...the only way I would would be to open the PCRA account and build it with Schwab's index funds and their ETFs.
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Are small and mid caps necessary?

Post by Twins Fan »

Are they "necessary"?... No. Depends on what someone wants, is all. They may boost performance, or they may drag performance down. Never know...

I'm with Steve and longtime here. OP, you have no need for bonds right now, no need for small or mid cap now, and even no need for international now. But, the international part is up to you. At .85 ER though, I would pass there...

Your savings/contribution rate is more important than any AA set up right now. You're just starting out and have a small portfolio. How much is 8% in bonds of a few thousand $$ going to smooth out the ride in a down turn?? Not much... Would losing 50% of your portfolio really make you lose sleep right now?? Probably not... In fact, you should hope for that in the starting accumulation phase.

Throw it all in the low ER S&P 500 fund and keep plowing money in there. That's what I do as a fellow small portfolio accumulator. :beer
Last edited by Twins Fan on Tue Jun 24, 2014 11:22 am, edited 1 time in total.
User avatar
telemark
Posts: 3389
Joined: Sat Aug 11, 2012 6:35 am

Re: Are small and mid caps necessary?

Post by telemark »

They're nice to have if you can get them, but no, they're not necessary. There's a school of thought that maintains that investing in the total market at its exact capitalization will produce the best risk-adjusted return, if not in the past then certainly in the future. This may or may not be true, but either way it's a small effect at best, and becomes diminishingly smaller as you approach perfection. For the rest of us close enough is good enough. People who have held an S&P 500 index for long periods have done very well by it.
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: Are small and mid caps necessary?

Post by JW-Retired »

mrehal wrote: I wanted a few opinions on my portfolio. My 401k is fairly new (2+ months) and fairly small (<$2000). I'm 27 and in the early accumulation stages.
I'm 92% stocks and 8% bonds.

My funds in my Schwab 401k are as follows:
69% SWPPX Schwab S+P 500 index fund, ER 0.09%
23% REREX American Funds EuroPacific GR 4 ER 0.85%
8% SRBFX Columbia Intermediate Bond Z ER 0.62%
At some point in the future when you can afford both a 401k and an IRA, you should switch a good portion of your highish ER International holdings to a Vanguard IRA, where you can also add small caps. Meanwhile, until you have like 20X more money in your account I think what you have chosen is fine. A 0.85% ER on $11.5k is only $78/yr.
JW
Retired at Last
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Are small and mid caps necessary?

Post by steve_14 »

longinvest wrote:
steve_14 wrote:IMO bonds and international aren't necessary until you have $200K+ saved. Small/mid caps are never necessary, but if I could add them at no additional cost, I'd take them (and in fact i do, in my TSM fund).
Of course, Steve's opinions about bonds are his own.

The Bogleheads Investment Philosophy is more balanced. It suggests that new investors that have not experienced a major market downturn can easily underestimate risk and overestimate their tolerance for risk, and should, therefore, include bonds in their portfolio.
Yes, that's a valid Bernstein-ism. Emotions aside, I was making the point that worrying about the fine points of asset allocation with $2K invested was a waste of time.
longinvest wrote:Bonds reduce the risk in a portfolio and increase its risk-adjusted returns.
Bonds will not increase risk adjusted returns. You should expect more risk to equal more return, in a linear fashion.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are small and mid caps necessary?

Post by abuss368 »

I do not use them but rather prefer a more Total Markets approach with incorporates Total Stock (US) and Total International. Jack Bogle has said these funds are not needed.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
cfs
Posts: 4154
Joined: Fri Feb 23, 2007 12:22 am
Location: ~ Mi Propio Camino ~

Re: Are small and mid caps necessary?

Post by cfs »

Necessary they are not.

No, but we like to add those Small Cap Value, Small Cap Growth, Small Cap Blend, Mid Cap Value, Mid Cap Growth, Mid Cap Blend to the mix just to complicate things a little trying to squeeze an extra penny. If I had to do it all over from day one I would do the two funds couch potato portfolio 50/50 of Total World Stock Index and Total Bond Market Index.

And now back to watching the World Cup.

Thanks for reading.
~ Member of the Active Retired Force since 2014 ~
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Are small and mid caps necessary?

Post by Rodc »

Bonds will not increase risk adjusted returns. You should expect more risk to equal more return, in a linear fashion.
Yes. For stock heavy portfolios that has been pretty consistently true.

People often get confused with bond heavy portfolios where adding a modest amount of stock generally increases returns and decreases volatility.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Are small and mid caps necessary?

Post by longinvest »

steve_14 wrote:
longinvest wrote:Bonds reduce the risk in a portfolio and increase its risk-adjusted returns.
Bonds will not increase risk adjusted returns. You should expect more risk to equal more return, in a linear fashion.
[Yes, they will (most likely) increase its Sharpe ratio.]

Without getting more into deep theories, let me just restate the first sentences of our philosophy:
The Bogleheads® follow a small number of simple investment principles that have been shown over time to produce risk-adjusted returns far greater than those achieved by the average investor. Many of these ideas are distilled from Nobel prize-winning financial economics research on topics like Modern Portfolio Theory and the Capital Asset Pricing Model.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Are small and mid caps necessary?

Post by steve_14 »

longinvest wrote:
steve_14 wrote:
longinvest wrote:Bonds reduce the risk in a portfolio and increase its risk-adjusted returns.
Bonds will not increase risk adjusted returns. You should expect more risk to equal more return, in a linear fashion.
[Yes, they will (most likely) increase its Sharpe ratio.]
This website has data for 20 portfolios from Jan 1928 - May 2014: http://www.ifa.com/portfolios/ . Each portfolio increases fixed income by 5% (figure 1), and rebalances annually.

Choose on the longest dataset (click on the "85+" button on figure 5) and you'll see that risk and return are strictly linear.
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Are small and mid caps necessary?

Post by longinvest »

steve_14 wrote:
longinvest wrote:
steve_14 wrote:
longinvest wrote:Bonds reduce the risk in a portfolio and increase its risk-adjusted returns.
Bonds will not increase risk adjusted returns. You should expect more risk to equal more return, in a linear fashion.
[Yes, they will (most likely) increase its Sharpe ratio.]
This website has data for 20 portfolios from Jan 1928 - May 2014: http://www.ifa.com/portfolios/ . Each portfolio increases fixed income by 5% (figure 1), and rebalances annually.

Choose on the longest dataset (click on the "85+" button on figure 5) and you'll see that risk and return are strictly linear.
Have you tried to calculate the Sharpe ratios? Please do. You'll discover that the 100% stocks portfolio was not efficient; it did not adequately compensate for the higher risk.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Are small and mid caps necessary?

Post by Rodc »

longinvest wrote:
steve_14 wrote:
longinvest wrote:
steve_14 wrote:
longinvest wrote:Bonds reduce the risk in a portfolio and increase its risk-adjusted returns.
Bonds will not increase risk adjusted returns. You should expect more risk to equal more return, in a linear fashion.
[Yes, they will (most likely) increase its Sharpe ratio.]
This website has data for 20 portfolios from Jan 1928 - May 2014: http://www.ifa.com/portfolios/ . Each portfolio increases fixed income by 5% (figure 1), and rebalances annually.

Choose on the longest dataset (click on the "85+" button on figure 5) and you'll see that risk and return are strictly linear.
Have you tried to calculate the Sharpe ratios? Please do. You'll discover that the 100% stocks portfolio was not efficient; it did not adequately compensate for the higher risk.
I did not look at this dataset, but generally highest Sharpe Ratio tends to occur down in the very high bond end of the spectrum, like 25% stocks and 75% bonds. While that is a high risk adjusted return it is too low return for most investors, especially young ones, and so it not appropriate for the OP. Up in the range of high stocks which is appropriate for a young investor, the risk vs return is pretty linear.

As an aside, last I looked, which was a few years ago, a lot of the IFA data were somewhat magically generated (often they took data from one asset subclass and just stuck it in to some other subclass for example when the real data did not exist, so proceed with caution when using their data.)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
vesalius
Posts: 794
Joined: Tue Jul 13, 2010 7:00 pm
Location: Texas

Re: Are small and mid caps necessary?

Post by vesalius »

Keep reading. You have plenty of time, years even to decide if you would like to tilt or not. Maximize your savings rate in the interim as that will vastly outweigh your asset allocation choices in regards to the total $$ invested in your account for the immediate future.

Read Bogle, read Swedroe, read Ferri, read Bernstein. Recommended reading list Oh and read this forum. Many will struggle back and forth with versions of this question.

If the PRCA option is free, I would say use it and use the Schwab Total US market, total international and Total bond funds for now, until you find the path you are most likely to stick with through the years of bull and bear markets. I went with a highly tilted Larry portfolio, but as Taylor is fond of saying "There is more than one road to Dublin."

Welcome Aboard.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Are small and mid caps necessary?

Post by steve_14 »

Rodc wrote:As an aside, last I looked, which was a few years ago, a lot of the IFA data were somewhat magically generated (often they took data from one asset subclass and just stuck it in to some other subclass for example when the real data did not exist, so proceed with caution when using their data.)
Could be. What really matters is the theory, not the history (since it surely won't match the future). And the theory is: The only way holding two asset classes can produce anything but a weighted average return is due to a rebalancing bonus or penalty. And you only get each of these with certain return patterns. Not prudent to assume a certain one will occur IMO.

Stocks and bonds are uncorrelated - you need negatively correlated assets for a consistent (expected) bonus.

Another way to think of it - if I hold a riskless bond or a CD, my cash flows are 100% certain. Their volatility is zero. Adding a risky asset class to the mix can only change risk in one direction.
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Are small and mid caps necessary?

Post by acegolfer »

steve_14 wrote:

Stocks and bonds are uncorrelated.
Can you prove this?

Are you suggesting bonds = riskfree asset?
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: Are small and mid caps necessary?

Post by Tamahome »

acegolfer wrote:
steve_14 wrote:

Stocks and bonds are uncorrelated.
Can you prove this?

Are you suggesting bonds = riskfree asset?
Correct me if I am wrong, but I believe his meaning in saying that they were not correlated was that they had low correlation. This does not mean they are risk free at all. It means the risks are different and have different triggers. Rising interest rates may be bad for a bond fund, yet may come at a time when the economy is booming (and thus stocks are rising). Similarly, the stock market may crash while the bond market holds steady. That means the two are not directly correlated. Of course, the inflation could drive interest rates up during a stock crash and both could drop. This means correlation is not inverse. They just have different factors that drive risk.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Are small and mid caps necessary?

Post by Rodc »

steve_14 wrote:
Rodc wrote:As an aside, last I looked, which was a few years ago, a lot of the IFA data were somewhat magically generated (often they took data from one asset subclass and just stuck it in to some other subclass for example when the real data did not exist, so proceed with caution when using their data.)
Could be. What really matters is the theory, not the history (since it surely won't match the future). And the theory is: The only way holding two asset classes can produce anything but a weighted average return is due to a rebalancing bonus or penalty. And you only get each of these with certain return patterns. Not prudent to assume a certain one will occur IMO.

Stocks and bonds are uncorrelated - you need negatively correlated assets for a consistent (expected) bonus.

Another way to think of it - if I hold a riskless bond or a CD, my cash flows are 100% certain. Their volatility is zero. Adding a risky asset class to the mix can only change risk in one direction.
I have no clue why you think that is an appropriate response to a general caution that the IFA data is suspect. :confused

And as another general comment, you really should not say look at the data, then when someone points out the data are suspect say well data are not important look at theory. If the point is the theory you should just have said so. You are just chasing your tail. :)

FWIW, I happen to agree with you on the issue of linearity. I have seen this in many datesets and never not seen it.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
garlandwhizzer
Posts: 3565
Joined: Fri Aug 06, 2010 3:42 pm

Re: Are small and mid caps necessary?

Post by garlandwhizzer »

I tilt to 40% MC+SC and 60% LC in my US portfolio and MC+SC 50%, 50%LC in international because I believe International SC+MC are better diversifiers to a US equity portfolio than international LC. Many of the investment sages who post on this board (Larry, Rick, Bill Bernstein, for example) tilt and give good historical evidence that it has increased long term returns. On the other hand, there are some wise, astute and experienced market analysts, Bogle and Buffett come to mind, who do not see the need for SC or MC at all and seem very happy with the S&P 500 for US equity exposure. Even though I tilt there is a case for not tilting particularly from the point of view of risk adjusted returns. I believe that most agree that MC+SC historical outperformance is not be a free lunch but rather a reward for tolerating more volatility and risk over time. So ultimately I don't think there's a single optimal portfolio for everybody when it comes to cap weight. You just have to know yourself and pick accordingly. If both approaches didn't work everybody would eventually be doing the same thing.

Garland Whizzer
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are small and mid caps necessary?

Post by abuss368 »

At the end of the day, if the addition of either or both of small and mid caps will allow an investor to sleep well at night and also stay the course in all markets, then by all means go for it.
John C. Bogle: “Simplicity is the master key to financial success."
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Are small and mid caps necessary?

Post by steve_14 »

Rodc wrote:
steve_14 wrote:
Rodc wrote:As an aside, last I looked, which was a few years ago, a lot of the IFA data were somewhat magically generated (often they took data from one asset subclass and just stuck it in to some other subclass for example when the real data did not exist, so proceed with caution when using their data.)
Could be. What really matters is the theory, not the history (since it surely won't match the future). And the theory is: The only way holding two asset classes can produce anything but a weighted average return is due to a rebalancing bonus or penalty. And you only get each of these with certain return patterns. Not prudent to assume a certain one will occur IMO.

Stocks and bonds are uncorrelated - you need negatively correlated assets for a consistent (expected) bonus.

Another way to think of it - if I hold a riskless bond or a CD, my cash flows are 100% certain. Their volatility is zero. Adding a risky asset class to the mix can only change risk in one direction.
I have no clue why you think that is an appropriate response to a general caution that the IFA data is suspect. :confused

And as another general comment, you really should not say look at the data, then when someone points out the data are suspect say well data are not important look at theory. If the point is the theory you should just have said so. You are just chasing your tail. :)

FWIW, I happen to agree with you on the issue of linearity. I have seen this in many datesets and never not seen it.
Well I'll be standing by my statements there. History is interesting, but I don't think our short data set is enough to draw any firm conclusions. Whether the IFA data is off by 10 BPS doesn't matter. What does matter is understanding the relationship between risk and return, so you know what to expect going forward.
rleonardh
Posts: 153
Joined: Wed Jun 11, 2014 1:08 pm

Re: Are small and mid caps necessary?

Post by rleonardh »

Add Total Stock Market index (any year) and anyone of the mid or small caps (same year) and devide by two. Tell me if mid or small is needed.
selters
Posts: 702
Joined: Thu Feb 27, 2014 8:26 am

Re: Are small and mid caps necessary?

Post by selters »

Longtimelurker wrote:if i were you, i would:

- be 100% in the low cost S&P 500 fund up to company match
- build an emergency fund with a savings account and I-bonds equal to 6-months expenses
- come back to the forum for advice when done
I definitely agree. The other two funds don't look good enough to be worth holding at this point in his investing lifetime (if ever).

As for small and mid caps, well, who knows? Historically they've outperformed large caps (but there have been decades where they've underperformed large caps), but with greater volatility.
gtwhitegold
Posts: 673
Joined: Fri Sep 21, 2012 1:55 pm

Re: Are small and mid caps necessary?

Post by gtwhitegold »

Considering how inexpensive the Schwab ETFs are, I would consider using SCHB(US), SCHF(INTL), and SCHZ(Bond) if your plan allows for ETFs.

Allen
richard
Posts: 7961
Joined: Tue Feb 20, 2007 2:38 pm
Contact:

Re: Are small and mid caps necessary?

Post by richard »

Would PCRA give you access to something closer to a total US stock fund, a total international fund and a total bond market fund (or ETFs for each)? If so, what would the expense ratios and any other costs be?

More diversified (TSM v S&P 500, etc.) and lower cost would be better.
User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: Are small and mid caps necessary?

Post by in_reality »

mrehal wrote: 69% SWPPX Schwab S+P 500 index fund, ER 0.09%
23% REREX American Funds EuroPacific GR 4 ER 0.85%
8% SRBFX Columbia Intermediate Bond Z ER 0.62%
PCRA
Yes! Small and mid caps are necessary! They behave differently than large caps and you should hold them in at least the market weight. (no comment on overweighting them)

Since Schwab ETFs are available for no fee through PCRA, it makes sense to use them.

I too hold American Funds EuroPacific Growth (as I have large capital gains), but next year (when my income will be much lower) will sell and replace them with Schwab ETFs. My reasoning is this: 1) lower ER, 2) the fund manager quit after 2013 and while the submanagers stayed ... who knows... 3) the capitalization of the fund is growing and growing. It used to be small cap relative to it's peers. I don't expect past returns going forward.

If you do go the Schwab ETF route, (I am and so of course think you should too), it's not as clean as Vanguard for international. SCHF 75% (int large cap and 10% mid cap), SCHC 10%(int small and mid cap), and SCHE 15%(emerging large -mid) is a market approximation. I added a non-Schwab ETF (EWX) to get small emerging exposure. Finally SCHC is Schwab's least liquid ETF. Watch the bid/spread on it if you are trading early in a session or best yet always place a limit on your order to be safe. That's just basic ETF trading technique though.

SCHB is total market for domestic stocks and easy enough.

The bottom line is by going with Schwab international ETFs your ER will be .10 (using the weighting above) compared to your current ER 0.85%. You'll get market cap exposure and won't have to worry about the managers trying a new direction which may or may not work. American Funds EuroPacific Growth have done well till now but you are too young to rely on it being steady for your investment horizon.

As for bonds, no comment. I used mostly 10 yr. CDs myself.

Note: I think it's up to your company if they match to your PCRA. I suspect they will but if they don't, you could try to hold only SWPPX there. You could suppliment that with a non-matched contribution to your PCRA by using SCHA (small caps) to get closer to market coverage. SCHX (large cap) and SCHA (small /mid caps) combine to give SCHB (total market). SWPPX and SCHX are pretty close though SCHX has a slightly higher midcap%. You can see it in morningstars instant xray.
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Are small and mid caps necessary?

Post by Rodc »

Well I'll be standing by my statements there. History is interesting, but I don't think our short data set is enough to draw any firm conclusions.


Well, the theory of how portfolio risk and return behaves when you have two assets A and B that are not perfectly correlated (for example stocks and bonds) says the risk vs return traced out as you go from 100% A to 100% B is convex. So there is a tangent portfolio with maximum Sharpe Ratio. Lower A or higher A than corresponding to this point has lower Sharpe Ratio. And convexity says the Sharpe Ratio gets lower and lower the more or the less A you hold from this point.

Theory does not say that at high stock allocations the relationship between risk and return should be linear. And in fact, strictly speaking, it is not in theory or in practice.

But history, data, has shown that generally the curvature is low enough that for most practical purposes we can treat it is linear "enough" for simple applications like retirement savings.

So longinvest is strictly speaking correct, but for practical reasons I think we can ignore the curvature for high stock portfolios.

So while I agree we don't have enough data to "prove" anything, both of us are relying on data in this case to form a belief that the risk-return curve is fairly well a straight line. It does not follow from theory.

Whether the IFA data is off by 10 BPS doesn't matter. What does matter is understanding the relationship between risk and return, so you know what to expect going forward.
Now you are just making stuff up. :)

The degree of error will depend on which dataset you are looking at. I have not tried to estimate the level of error. In the case where they substitute data X into data series Y because Y is missing from the historical record, there is no great way to estimate the error, though I can imagine some ways to try.

But that is all a red herring. My only point was to others who might see those data and think they hit the motherload to read the fine print and be careful. To IFA's credit, last I looked at least, the fine print very carefully explained which data were real, which were not, and in the case of not, what the data were (ie they might call something X but in reality it was Y and they tell you what Y is).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Topic Author
mrehal
Posts: 136
Joined: Thu Apr 10, 2014 7:15 pm

Re: Are small and mid caps necessary?

Post by mrehal »

Thank you all so much for your input and intellectual discussion.
It seems as though the consensus seems to be wait to delegate an AA until my portfolio is quite larger. My thoughts were to be as diversified as possible while accumulating much growth, with a good amount of risk. But, as many have said, this early in the game a 50% drop wouldn't hurt, but mostly help my accumulation, so I would imagine it would make sense to go basically all in the S&P 500 index fund, although I would like to have some bond exposure.
The PCRA would give me access to a total market fund SWTSX as well as their super low cost ETFs.
Bernstein speaks about a 3 fund portfolio in his e-book If You Can and that reinforced my current AA.

I was just unaware at this point it's more important how much I save and not where I save it (international or bond-wise).
Post Reply