Should I be distributed throughout the Style Map?

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chambers136
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Should I be distributed throughout the Style Map?

Post by chambers136 » Wed Mar 08, 2017 7:54 am

When you look up funds, they give the style map where they fall- large value, mid blend, etc. Should I try to make my investments fall into as many of these as I can, or is this not very important? I'm currently trying to shift things around from funds my wife had with an adviser.

Tamalak
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Re: Should I be distributed throughout the Style Map?

Post by Tamalak » Wed Mar 08, 2017 8:46 am

The 'standard' boglehead way to invest is to own the same % of every corporation. This naturally biases towards large-cap companies on the style map, since you have to invest more dollars to buy a billionth of Google than a billionth of Malaysia Airlines. This is also how I personally invest.

Distributing yourself 'equally' on the style map is also acceptable as long as you stick to low cost index funds, but be aware that by doing this you will have much greater risk of portfolio loss along with a corresponding greater expected return. The smaller the cap, the more risk of loss and the bigger average return. You will essentially be going above 100% equity exposure.

dbr
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Re: Should I be distributed throughout the Style Map?

Post by dbr » Wed Mar 08, 2017 8:51 am

mikejomike wrote:When you look up funds, they give the style map where they fall- large value, mid blend, etc. Should I try to make my investments fall into as many of these as I can, or is this not very important? I'm currently trying to shift things around from funds my wife had with an adviser.
No. The style map of all the possible investments in the stock market by capital weighting is not evenly distributed. More exactly the definitions of value to growth result in equal divisions but the definitions of size do not.

If you want a lot of very complicated discussion you can look up the topic of fundamental weighting and the topic of tilting to asset classes.

livesoft
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Re: Should I be distributed throughout the Style Map?

Post by livesoft » Wed Mar 08, 2017 8:55 am

Be sure to at least use a good tool to compute the style map. See some good and bad tools in this thread: viewtopic.php?t=150267
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GLState
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Re: Should I be distributed throughout the Style Map?

Post by GLState » Wed Mar 08, 2017 9:03 am

First determine the type of portfolio that you want, then buy funds that fit this preference. Don't just choose a different style box with each purchase...you'll end up with a hodgepodge of funds with no direction. Understand what the style box is saying....buying a value and a growth fund results in a more expensive blend portfolio. For most bogleheads, the US stock portion of their portfolios will likely look like the VTI's or VOO's style box ....basically a large cap blend. However, some investors prefer a portfolio weighted more toward small and/or value characteristics.

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bertilak
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Re: Should I be distributed throughout the Style Map?

Post by bertilak » Wed Mar 08, 2017 9:28 am

The "default" allocation is to own the "Total Stock Market" aka TSM. This can be accomplished via any of the many TSM index funds available. Bogleheads tend to use Vanguard's version, VTSMX, minimum investment $3000, or if you have at least $10,000 VTSAX for its lower expense ratio.

VTSMX (or VTSAX) hold stocks in all of the style map boxes, but not in equal proportion. The stocks are held in the proportions (by dollar value) held by the entire stock market. This is called "capital weighted" aka "Cap Weighted Indexing." The theory is twofold:
  1. Cap weighting is the most effective allocation because it reflects the combined wisdom of all market participants. This does not mean it is the best allocation, only that one needs to work very hard to find a better allocation. Many think they can do that, or can at least invest with companies that can do that for them. That is called "active investing" and the historical record for it is not encouraging, especially after taking into account he extra costs (see number 2 below) of doing this.

    Holding other than a cap-weighted allocation is called "tilting." The favorite tilt is, I believe, Small Cap Value and there is evidence that this might get one a better risk-weighted return. There is also evidence that one may need to wait a long time for this extra return to show up.
  2. Costs matter. It has been shown (e.g. by Morningstar) that the best predictor of fund performance is cost, the lower the better. Cap weighted index funds are almost invariably cheaper than active funds. No expensive analysts are needed. Very little trading is needed because, as stock prices vary, the cap weighting of the fund is, by definition, maintained -- without the need to recalculate and trade stocks. With active investing, when whatever criteria is used to establish a fund's holdings indicates a change is needed, stocks need to be bought and sold with the associated costs and tax consequences.
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chambers136
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Re: Should I be distributed throughout the Style Map?

Post by chambers136 » Wed Mar 08, 2017 9:50 am

Thanks for the responses. I think I currently have the hodgepodge of funds, partially because of limited offerings in 401k's. But I'm in the process of moving the funds that I have more control over to the total market funds.

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