Making my own Total US stock market fund.

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paulso21
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Making my own Total US stock market fund.

Post by paulso21 » Mon Sep 18, 2017 7:02 am

Hello,

Currently I am investing with my 401k plan through work. I'd like to be in a total US stock market index fund but unfortunately that is not offered. They do however offer a Large 500 index fund, Mid and Small cap index fund. Currently I have 30% invested into each of the Lg, Mid and Small along with 5% in an international index fund and 5% in a bond index. I was thinking about this allocation the other day and with my allocation being evenly split between Lg, Mid and small and I don't think I would reflect a total stock market index since a total stock market index would be more heavily weighted toward Large cap stocks. Any recommendations as to what my allocation should be in order to be closer to a Total Stock Market fund. The Symbols of my funds are FUSVX, FSCKX and FSSVX. Thanks for any input.

Jack FFR1846
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Re: Making my own Total US stock market fund.

Post by Jack FFR1846 » Mon Sep 18, 2017 7:08 am

100% FUSVX.

But I'm getting ahead of myself. Is this 401k the only retirement savings you have? If so, the above stands. If not, you'd want to list what else you have and form an AA over all of your accounts. I have a similar choice in my 401k and it's 100% FUSVX (no total us stock available). My IRA dwarfs my 401k and holds total US stock. I hold no specific mid or small cap funds anywhere.
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Valuethinker
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Re: Making my own Total US stock market fund.

Post by Valuethinker » Mon Sep 18, 2017 7:28 am

paulso21 wrote:
Mon Sep 18, 2017 7:02 am
Hello,

Currently I am investing with my 401k plan through work. I'd like to be in a total US stock market index fund but unfortunately that is not offered. They do however offer a Large 500 index fund, Mid and Small cap index fund. Currently I have 30% invested into each of the Lg, Mid and Small along with 5% in an international index fund and 5% in a bond index. I was thinking about this allocation the other day and with my allocation being evenly split between Lg, Mid and small and I don't think I would reflect a total stock market index since a total stock market index would be more heavily weighted toward Large cap stocks. Any recommendations as to what my allocation should be in order to be closer to a Total Stock Market fund. The Symbols of my funds are FUSVX, FSCKX and FSSVX. Thanks for any input.
The S&P 500 and the Vanguard Total Stock Market have tracked each other for a long time-- the difference in total return over time is quite small.

The Small Cap effect seems to be real, but intermittent. Small Cap Value is much stronger, and even more intermittent. I don't think omitting small caps from your portfolio is going to be a make or break in terms of your end of savings period wealth.

In particular I remember a time in the 1990s when SC underperformed quite badly for about 8 years. This was just after the effect became widely publicized and a lot of SC funds were launched. In other words, the market is efficient. A new anomaly is discovered and then money pours in, eliminating the anomaly. To the extent the anomaly remains, it is because it represents higher risk for investors.

If we read later editions of Burton Malkiel, the main reason to prefer a Total Stock Market fund over an S&P 500 one is that hedge funds have learned to game the promotion/ demotion of stocks in the S&P 500 -- going long on the ones most likely to be promoted to, and short on the ones most likely to be demoted. That transfers performance from the holders of S&P 500 index funds to the hedge funds. The index providers have gotten cleverer at fighting that (I think it is the Russell Indices, which are mechanically composed, which have suffered this the worst). It's not a big difference to performance.

I believe the correct percentages are approximately (someone more knowledgeable will correct me at that point, or point me to the wiki?):

80% S&P 500
15% Mid Cap
5% Small Cap

However 75/15/10 would also work.

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in_reality
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Re: Making my own Total US stock market fund.

Post by in_reality » Mon Sep 18, 2017 7:49 am

Valuethinker wrote:
Mon Sep 18, 2017 7:28 am

I believe the correct percentages are approximately (someone more knowledgeable will correct me at that point, or point me to the wiki?):

80% S&P 500
15% Mid Cap
5% Small Cap

However 75/15/10 would also work.
81% Vanguard 500 Index Fund (VFINX)
4% Vanguard Mid-Cap Index Fund (VIMSX)
15% Vanguard Small-Cap Index Fund (NAESX)

-or-

81% Vanguard 500 Index Fund (VFINX)
19% Vanguard Extended Market Index Fund (VEXMX)

https://www.bogleheads.org/wiki/Approxi ... ock_market

neilpilot
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Re: Making my own Total US stock market fund.

Post by neilpilot » Mon Sep 18, 2017 8:05 am

Why am I confused by this discussion? Isn't VTSMX, or VTSAX, or VTI a total US Stock Market fund?

GLState
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Re: Making my own Total US stock market fund.

Post by GLState » Mon Sep 18, 2017 8:49 am

neilpilot wrote:
Mon Sep 18, 2017 8:05 am
Why am I confused by this discussion? Isn't VTSMX, or VTSAX, or VTI a total US Stock Market fund?
According to the OP, a Total Market fund (VTSMX, VYSAX, or VTI) isn't offered in their 401K. They want to replicate the TM fund with large, mid-cap, and small funds.

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Re: Making my own Total US stock market fund.

Post by neilpilot » Mon Sep 18, 2017 9:22 am

GLState wrote:
Mon Sep 18, 2017 8:49 am
neilpilot wrote:
Mon Sep 18, 2017 8:05 am
Why am I confused by this discussion? Isn't VTSMX, or VTSAX, or VTI a total US Stock Market fund?
According to the OP, a Total Market fund (VTSMX, VYSAX, or VTI) isn't offered in their 401K. They want to replicate the TM fund with large, mid-cap, and small funds.
Of course I need to read the OP's post more carefully. Is been years since I freed myself of the constraints of 401k fund selection, and I forget what it's like.

avalpert
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Re: Making my own Total US stock market fund.

Post by avalpert » Mon Sep 18, 2017 9:36 am

paulso21 wrote:
Mon Sep 18, 2017 7:02 am
Hello,

Currently I am investing with my 401k plan through work. I'd like to be in a total US stock market index fund but unfortunately that is not offered. They do however offer a Large 500 index fund, Mid and Small cap index fund. Currently I have 30% invested into each of the Lg, Mid and Small along with 5% in an international index fund and 5% in a bond index. I was thinking about this allocation the other day and with my allocation being evenly split between Lg, Mid and small and I don't think I would reflect a total stock market index since a total stock market index would be more heavily weighted toward Large cap stocks. Any recommendations as to what my allocation should be in order to be closer to a Total Stock Market fund. The Symbols of my funds are FUSVX, FSCKX and FSSVX. Thanks for any input.
You are right that an even split will give you a tilt towards small cap stocks. The challenge is these three funds aren't covering mutually exclusive ground so you can't really match the total market.

FUSVX tracks the S&P 500 while FSCKX tracks the Russell Midcap Index that covers the companies #201-1000 in size from the Russell 1000 - so those two overlap. FSSVX covers the Russell 2000. What's more, since the Russell indexes cutoff by # of companies rather than targeting a set % of the market (like MSCI) the true coverage percentage of a given index varies over time.

That said, a rough approximation of 80/10/10 is close enough - and really, any more precision is unnecessary.

Valuethinker
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Re: Making my own Total US stock market fund.

Post by Valuethinker » Mon Sep 18, 2017 11:36 am

Valuethinker wrote:
Mon Sep 18, 2017 7:28 am

I believe the correct percentages are approximately (someone more knowledgeable will correct me at that point, or point me to the wiki?):

80% S&P 500
15% Mid Cap
5% Small Cap

However 75/15/10 would also work.
And I have been corrected by in_reality's post.

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Re: Making my own Total US stock market fund.

Post by nisiprius » Mon Sep 18, 2017 12:15 pm

paulso21, it would help if you would give the exact ticker symbol for the mid-cap and small-cap funds.

I wouldn't fuss too much about false precision, but equal parts S&P 500, mid-cap, and small-cap is a large tilt and it would probably only be favored by people with strong convictions about mid-caps and small-caps.

However, the S&P 500 is 80% of the stock market by cap-weight, and as others have mentioned is surprisingly close to the total market all by itself. So, just pulling round numbers out of the air, let's use PortfolioVisualizer to look at

VFINX Vanguard 500 Index Fund 80.00%
VIMSX Vanguard Mid-Cap Index Fund 10.00%
NAESX Vanguard Small-Cap Index Fund 10.00%

Actually, I know from past experience that mid-caps and small-caps are fairly similar, so once you decide to only hold 80% S&P 500, how you divvy up the rest between mid-caps and small-caps is probably not going to make much difference.

Portfolio 1, blue, is 100% VFINX, the Vanguard 500 index fund,
Portfolio 2, red, is 100% VTSMX, the Vanguard Total Stock Market Index Fund, which is what you are trying to ge to.
Portfolio 3, orange is the 80/10/10 mix I just suggested.

I claim that the orange 80/10/10 portfolio is pretty close to the red Total Stock portfolio.

Source
Image

Now, we are going to put in your 1/3-each portfolio. This time, portfolio 1, blue, is 33.3%-each VFINX, VIMSX, NAESX, i.e. it's your present portfolio. Portfolio 2, again, is Total Stock, which is what you'd like to have. Portfolio 3 is the 80/10/10 portfolio.

Source
Image

I claim that the orange 80/10/10 portfolio is much closer to the red Total Stock portfolio than your current blue 1/3-1/3-1/3 portfolio is.

However, there's a "problem," because in fact your portfolio has done much better than Total Stock. I don't want to go too far down that road except to say a) that's why a lot of people like small-caps and mid-caps, but b) there is good deal of debate in this forum and elsewhere about whether you can count on these always performing better, and whether it is just a question of more reward for more risk.

Anyway: if what you want is an approximation to the total market, then 80% S&P 500, 10% mid-caps, 10% small-caps is a reasonable approximation; it's closer to the total market than the S&P 500 alone is; and 1/3rd each S&P 500, mid-caps, and small-caps is a gross over-correction, has much too much in small- and mid-caps, and has moved you farther from the total market than if you'd just stayed 100% in the S&P 500.
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Re: Making my own Total US stock market fund.

Post by Kevin M » Mon Sep 18, 2017 1:07 pm

avalpert wrote:
Mon Sep 18, 2017 9:36 am
FUSVX tracks the S&P 500 while FSCKX tracks the Russell Midcap Index that covers the companies #201-1000 in size from the Russell 1000 - so those two overlap. FSSVX covers the Russell 2000. What's more, since the Russell indexes cutoff by # of companies rather than targeting a set % of the market (like MSCI) the true coverage percentage of a given index varies over time.

That said, a rough approximation of 80/10/10 is close enough - and really, any more precision is unnecessary.
Agree that if you do 80-85% FUSVX (or any other S&P 500 index fund) and 15-20% in a small-cap fund, or maybe mid-cap fund, depending on the fund family, then you'll be close enough. Having said that, although the Wiki article on this doesn't have your specific funds, it does have an AA with another Russell 2000 fund:

85% Vanguard 500 Index Fund (VFINX)
15% iShares Russell 2000 Index (IWM)

The Fidelity 500 index fund should match almost exactly the Vanguard 500 index fund, and any Russell 2000 Index fund should be close enough to be considered interchangeable (there will be differences due to expense ratio and tracking error, but since you are limited to what's in your 401k, you don't have control over these variables).

Good enough.

Kevin
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avalpert
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Re: Making my own Total US stock market fund.

Post by avalpert » Mon Sep 18, 2017 1:17 pm

Kevin M wrote:
Mon Sep 18, 2017 1:07 pm
avalpert wrote:
Mon Sep 18, 2017 9:36 am
FUSVX tracks the S&P 500 while FSCKX tracks the Russell Midcap Index that covers the companies #201-1000 in size from the Russell 1000 - so those two overlap. FSSVX covers the Russell 2000. What's more, since the Russell indexes cutoff by # of companies rather than targeting a set % of the market (like MSCI) the true coverage percentage of a given index varies over time.

That said, a rough approximation of 80/10/10 is close enough - and really, any more precision is unnecessary.
Agree that if you do 80-85% FUSVX (or any other S&P 500 index fund) and 15-20% in a small-cap fund, or maybe mid-cap fund, depending on the fund family, then you'll be close enough. Having said that, although the Wiki article on this doesn't have your specific funds, it does have an AA with another Russell 2000 fund:

85% Vanguard 500 Index Fund (VFINX)
15% iShares Russell 2000 Index (IWM)

The Fidelity 500 index fund should match almost exactly the Vanguard 500 index fund, and any Russell 2000 Index fund should be close enough to be considered interchangeable (there will be differences due to expense ratio and tracking error, but since you are limited to what's in your 401k, you don't have control over these variables).

Good enough.

Kevin
What's interesting about that mix is that it leaves a hole in midcap coverage - everyone's forgotten step-child.

The factor exposure is very close to Vanguard's total market fund (though not quite as close as the 80/10/10 mix) but the unloved midcaps remain unloved.

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Re: Making my own Total US stock market fund.

Post by Kevin M » Mon Sep 18, 2017 2:59 pm

avalpert wrote:
Mon Sep 18, 2017 1:17 pm
What's interesting about that mix is that it leaves a hole in midcap coverage - everyone's forgotten step-child.

The factor exposure is very close to Vanguard's total market fund (though not quite as close as the 80/10/10 mix) but the unloved midcaps remain unloved.
Three points. First, small-cap and mid-cap performance are very similar, but perhaps not as much with the Russell index funds as with the standard Vanguard funds (for the latter, you can barely see the difference on a chart if you exclude a few anomalous months in 2000). Second, since you're only talking about shifting 5-10% of the stock allocation between funds that already are much more similar than they are to a 500 index fund (which will dominate the performance), it's just not going to make much difference. Third, the simplicity of having to rebalance between two funds instead of three is worth something if simplicity is one of your objectives (and it typically is for Bogleheads).

Of course you could extend the latter argument to argue for just using the 500 index fund, since as others have pointed out, the difference of adding 15-20% of small caps doesn't have a huge impact. This is especially true if the small/mid-cap funds are significantly more expensive.

Midcaps are not unloved in my book. I've posted many times that I'd be happy to use the Vanguard mid-cap fund in lieu of the small-cap fund if that's what my 401k offered. It's just not going to make enough difference to worry about. The mistake that some of the mid-cap fans make is thinking that mid-cap performance is about in the middle of large-cap and small-cap, which definitely has not been the case (again, especially with the Vanguard funds). I would substitute the Vanguard mid-cap fund for small-cap, but I would not use a mid cap fund as a substitute for say a 50/50 mix of large cap and small cap.

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Re: Making my own Total US stock market fund.

Post by avalpert » Mon Sep 18, 2017 3:16 pm

Kevin M wrote:
Mon Sep 18, 2017 2:59 pm
avalpert wrote:
Mon Sep 18, 2017 1:17 pm
What's interesting about that mix is that it leaves a hole in midcap coverage - everyone's forgotten step-child.

The factor exposure is very close to Vanguard's total market fund (though not quite as close as the 80/10/10 mix) but the unloved midcaps remain unloved.
Three points. First, small-cap and mid-cap performance are very similar, but perhaps not as much with the Russell index funds as with the standard Vanguard funds (for the latter, you can barely see the difference on a chart if you exclude a few anomalous months in 2000). Second, since you're only talking about shifting 5-10% of the stock allocation between funds that already are much more similar than they are to a 500 index fund (which will dominate the performance), it's just not going to make much difference. Third, the simplicity of having to rebalance between two funds instead of three is worth something if simplicity is one of your objectives (and it typically is for Bogleheads).
I don't necessarily disagree with that - but I still find it interesting that they would suggest a two fund portfolio that excludes the middle of the market when you can easily do a two fund portfolio of VFINX and VXF (Vanguard's extended market) that doesn't. Just as simple and fully comprehensive.
I would substitute the Vanguard mid-cap fund for small-cap, but I would not use a mid cap fund as a substitute for say a 50/50 mix of large cap and small cap.
This is definitely true - and an example of why I think it is important to know what you are trying to accomplish before choosing funds as opposed to arbitrarily selecting a mix of funds. If you goal is a small cap tilt then a 50/50 mix may be a good way to get it (depending on what tilt you are going for), if you are trying to track the market it most certainly will not be.

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Re: Making my own Total US stock market fund.

Post by Kevin M » Mon Sep 18, 2017 3:21 pm

avalpert wrote:
Mon Sep 18, 2017 3:16 pm
I don't necessarily disagree with that - but I still find it interesting that they would suggest a two fund portfolio that excludes the middle of the market when you can easily do a two fund portfolio of VFINX and VXF (Vanguard's extended market) that doesn't. Just as simple and fully comprehensive.
Sure. I think the different solutions in the Wiki are to help folks who have limited choices in their 401k plans. Supplementing a 500 index fund with an extended market fund is the cleanest simple solution if you have those two funds in your 401k but not total market fund. I didn't see OP list an extended market fund as an option.

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Re: Making my own Total US stock market fund.

Post by mega317 » Mon Sep 18, 2017 3:33 pm

This is a bit off topic, but OP has a very small bond allocation. Depending on your age and risk tolerance you might be better served with more bonds. If you haven't given it much thought, that decision is much more important than the one being discussed here. Sorry for the interruption.

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Re: Making my own Total US stock market fund.

Post by jalbert » Mon Sep 18, 2017 4:54 pm

The Symbols of my funds are FUSVX, FSCKX and FSSVX. Thanks for any input.
The good news is that these funds have very low expense ratios, so you seem to have a good 401K plan available.

For reasons I don't understand, a lot of 401K plans offer index funds that slice the market but include pieces from different index providers, which slice the market at different points, leading to overlap or gaps when they are combined.

It is also annoying that Fidelity does not seem to display the index tracked by an index fund fairly prominently on their web site. It appears to me that FUSVX tracks the S&P500 but the other two funds track the Russell Mid-cap and Small-cap indices respectively,

If that is the case, then FSCKX and FSSVX fit together with no overlap or gap. But the Russell mid-cap index consists of the 800 smallest companies of the Russell 1000 while the S&P500 consists of (approximately) the 500 largest companies of the Russell 1000. These two funds have substantial overlap.

Another concern is that the Russell 2000 (index tracked by FSSVX) has been susceptible to its index changes being front-runned. Russell has addressed this to some extent, but hard to know if fully addressed.

The short answer is that no combination of these three funds will exactly replicate a total US index fund. A portfolio like:

70% FUSVX
20% FSCKX
10% FSSVX

Would exhibit the correct market weighting of small caps (the Russell 2000 is the lowest 10% of the Russell 3000 by market cap), and would be approximately correct for midcaps and large caps, but because some of the large cap weighting is achieved by the 300 or so Russell midcap index stocks that are also part of the S&P500, the net effect is to tilt the large cap holdings away from the 200 or so largest stocks in the S&P500 (that are not present in the Russell midcap index). Some would consider this a benefit by reducing the concentration of the total US market in the largest stocks in the market.

I agree with others that you may want to revisit the thinking around your bond allocation and also allocation to int'l stocks, both of which seem low.
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Re: Making my own Total US stock market fund.

Post by nisiprius » Mon Sep 18, 2017 5:14 pm

Since the plan is offering Fidelity funds, it's likely managed by Fidelity. The good new for you is that Fidelity, the company, has two low-cost, perfectly good index funds--IMHO virtual clones of their Vanguard counterparts:

FSEVX, Fidelity Extended Market Index Fund (premium class)
FSTVX, Fidelity Total Market Index Fund (premium class)

FSEVX is an extended market index fund which tracks the Dow Jones U.S. Completion Index. This, in turn, is exactly the total stock market after you remove the S&P 500. So if you allocate whatever are the exactly correct current proportions, about 80% FSUVX and 20% FSEVX, you have exactly the total stock market... and because of the nature of cap-weighting, you won't need to rebalance.

See the Wiki article, Extended market index fund for more information.

FSTVX is just a total stock market index fund, counterpart to Vanguard's VTSMX/VTSAX.

So what good is this if they aren't in your 401(k) plan? The answer is that you might very well be able to get them added to the plan just by asking politely. You want to see if you can talk HR into telling you the name of the appropriate person on the 401(k) committee, or just give a short and well-phrased letter to HR. Don't waste any time at all talking about how good indexing is, the case you want to make is simply "employees--namely me--have asked for it." Specifically, say you want to invest in the total market, not just the S&P 500, and you can't quite do that with the funds that are available... and they could solve that problem either by adding FSEVX or by adding FSTVX.

The reason you can't quite do it, by the way, is that the S&P 500 is not the 500 largest-cap stocks and is not a pure large-cap index; it's a mixture of large-caps and some mid-caps, so adding a mid-cap fund always results in duplicating holdings that are in the S&P 500.

It's worth a try. Something like that worked once for me.

The other thing is that depending on how much the company matches and how much you are able to save, you may find that you are using a combination of the company's 401(k) plan and your own personal Roth IRA. You can put anything you want in the Roth IRA, so one way to make your own Total US Stock Market holding is to hold only the S&P 500 fund in the 401(k), and hold Fidelity's or Vanguard's extended index fund, in the right proportion, in your Roth IRA.
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Re: Making my own Total US stock market fund.

Post by paulso21 » Tue Sep 19, 2017 7:24 am

mega317 wrote:
Mon Sep 18, 2017 3:33 pm
This is a bit off topic, but OP has a very small bond allocation. Depending on your age and risk tolerance you might be better served with more bonds. If you haven't given it much thought, that decision is much more important than the one being discussed here. Sorry for the interruption.
I'm a 33 year old physician. I would like to maintain an aggressive portfolio for approx 10 years or so before adding to my bond allocation. i recently had 10% in bonds and nothing in international. I go back and forth whether the SP 500 fund of US corporations with world wide reach is enough of an international holding or not but i don't think that's something that will ever have a definitive answer.

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Re: Making my own Total US stock market fund.

Post by Valuethinker » Tue Sep 19, 2017 9:08 am

paulso21 wrote:
Tue Sep 19, 2017 7:24 am
mega317 wrote:
Mon Sep 18, 2017 3:33 pm
This is a bit off topic, but OP has a very small bond allocation. Depending on your age and risk tolerance you might be better served with more bonds. If you haven't given it much thought, that decision is much more important than the one being discussed here. Sorry for the interruption.
I'm a 33 year old physician. I would like to maintain an aggressive portfolio for approx 10 years or so before adding to my bond allocation. i recently had 10% in bonds and nothing in international. I go back and forth whether the SP 500 fund of US corporations with world wide reach is enough of an international holding or not but i don't think that's something that will ever have a definitive answer.
OK if you have significant debts repayment of those is a risk free way of approximating investing in bonds. The exception is mortgage debt which because it is long term and low interest rate, it may not pay to repay early. Certainly one should make full use of annual tax exempt our allowances before repaying mortgage debt.

Generally though, I think the rule "25% in bonds, or 20% at a minimum" is not a bad one (Ben Graham's dictum was at least 25% and not more than 75% in bonds). In the next bear market, this will give you needed firepower for rebalancing. And very few of us really have a handle on our reactions in a bad bear market.

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Re: Making my own Total US stock market fund.

Post by mega317 » Tue Sep 19, 2017 5:03 pm

Valuethinker wrote:
Tue Sep 19, 2017 9:08 am
And very few of us really have a handle on our reactions in a bad bear market.
This is the key to me. As a 33 year old physician you had no money at stake in the last crash. (I am a 35 year old physician and had a total of about 2 months of intern DCP invested; I am quite sure I have no idea how I will feel next time.)

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