Buy Vanguard Total Stock Market Index Fund (VTSMX) or is exposure to Vanguard 500 Index (VFIAX) enough?

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JEQTrust
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Buy Vanguard Total Stock Market Index Fund (VTSMX) or is exposure to Vanguard 500 Index (VFIAX) enough?

Post by JEQTrust »

Hi,
I am so thankful that I found this site and the Bogleheads. This is my first post and I am new to creating an Asset Allocation strategy. I have access to and am investing a good portion of my and my wife's 401ks to the Vanguard 500 Index Fund (VFIAX) as part of my US stock allocation. Unfortunately neither of us has access to Vanguard Total Stock Market Index Fund (VTSMX) or similar funds in our 401ks. I am also trying to buy REITs in my IRA account to follow my strategy. My question, is my exposure to Vanguard 500 Index Fund enough or should I consider buying the Vanguard Total Stock Market Index Fund (VTSMX) before allocating new money to REITs? Hopefully my questions makes sense. Thanks for your time.
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Kevin M
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Re: Buy Vanguard Total Stock Market Index Fund (VTSMX) or is exposure to Vanguard 500 Index (VFIAX) enough?

Post by Kevin M »

The 500 Index comprises about 80% of the total US stock market. There are various ways to use small-cap and/or mid-cap funds to get the other 20%: Approximating total stock market - Bogleheads. A simple way would be to use the Vanguard Extended Market Index fund in your IRA. Or, your 401k may have a decent small-cap or mid-cap fund that could be used for this.

Since the large-cap stocks in the 500 index dominate the performance of the total stock market, you're pretty good with just 500 index. Looking at a growth chart, there's not much difference: Backtest Portfolio Asset Class Allocation. Total stock will do a bit better when small/mid-cap stocks outperform, and 500 index will do a bit better when large-cap stocks outperform.

Kevin
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PFInterest
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Re: Buy Vanguard Total Stock Market Index Fund (VTSMX) or is exposure to Vanguard 500 Index (VFIAX) enough?

Post by PFInterest »

its fine. do you have other stock options to compliment it?
Valuethinker
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Re: Buy Vanguard Total Stock Market Index Fund (VTSMX) or is exposure to Vanguard 500 Index (VFIAX) enough?

Post by Valuethinker »

JEQTrust wrote:Hi,
I am so thankful that I found this site and the Bogleheads. This is my first post and I am new to creating an Asset Allocation strategy. I have access to and am investing a good portion of my and my wife's 401ks to the Vanguard 500 Index Fund (VFIAX) as part of my US stock allocation. Unfortunately neither of us has access to Vanguard Total Stock Market Index Fund (VTSMX) or similar funds in our 401ks. I am also trying to buy REITs in my IRA account to follow my strategy. My question, is my exposure to Vanguard 500 Index Fund enough or should I consider buying the Vanguard Total Stock Market Index Fund (VTSMX) before allocating new money to REITs? Hopefully my questions makes sense. Thanks for your time.
Kevin M has given you a good, clear answer.

The bottom line is you should be fine. The small and mid cap exposure is nice to have, and on past history would do better (80% large cap, 20% mid & small cap) than the S&P 500 (100% large cap). But the difference is not huge I don't think.
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ruralavalon
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Re: Buy Vanguard Total Stock Market Index Fund (VTSMX) or is exposure to Vanguard 500 Index (VFIAX) enough?

Post by ruralavalon »

Welcome to the forum :) .
JEQTrust wrote:Hi,
I am so thankful that I found this site and the Bogleheads. This is my first post and I am new to creating an Asset Allocation strategy. I have access to and am investing a good portion of my and my wife's 401ks to the Vanguard 500 Index Fund (VFIAX) as part of my US stock allocation. Unfortunately neither of us has access to Vanguard Total Stock Market Index Fund (VTSMX) or similar funds in our 401ks. I am also trying to buy REITs in my IRA account to follow my strategy. My question, is my exposure to Vanguard 500 Index Fund enough or should I consider buying the Vanguard Total Stock Market Index Fund (VTSMX) before allocating new money to REITs? Hopefully my questions makes sense. Thanks for your time.
In my opinion the Vanguard 500 Index Fund (VFIAX) is enough for a US stock allocation.

For domestic stocks I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund is good enough for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations". An S&P 500 index fund covers 81% of the U.S. stock market, and in the 25 years since the creation of the first total stock market fund the performance of the two types of funds has been almost identical. Morningstar “growth of $10k” graph, VFINX vs VTSMX. See also Allan Roth, CBS Moneywatch, "John C. Bogle on the S&P 500 vs. the Total Stock Market". So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically added little in performance.

If an extended market or small-cap index fund is offered in your 401k, then you can create a mix to closely approximate a total market index fund. Wiki article, "Approximating total stock market".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
JEQTrust
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Re: Buy Vanguard Total Stock Market Index Fund (VTSMX) or is exposure to Vanguard 500 Index (VFIAX) enough?

Post by JEQTrust »

Thanks for all the great information and advice. According to what I have read I should have this covered because I am allocating a small portion of my wife's 401k to Vanguard Small Cap Index Fund (15%) and a smaller portion to the Vanguard Mid-Cap Growth Index Fund (5%). I also sold shares I had in Fidelity's S&P 500 Index fund to purchase the Vanguard Small Capitalization Value Index Fund (VISVX), which I will try to grow after I build my REIT allocation to around 8%. Thanks again.
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