Vanguard Total Stock Market Index vs 500 Index

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goshenBogle
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Vanguard Total Stock Market Index vs 500 Index

Post by goshenBogle » Mon May 28, 2018 6:11 pm

We have been slowly moving our portfolio to more index funds and less actively managed funds. For our next move, we are trying to decide between the Vanguard Total Stock Market Index (VTSAX) and 500 Index (VFIAX). Their returns over the last 10 years are very similar. What rationale would we apply to decide in which of these two to invest?
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alex_686
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by alex_686 » Mon May 28, 2018 6:16 pm

In theory the market basket is the most efficient portfolio. So I would lean towards TSM. It has more companies and looks more like the market basket.

On the flip side, the further you dig down into small caps the higher the expense is. No just the expense ratio, but more importantly trading costs, which don't show up in the expense ratio. Bid/ask spreads are bigger.

Or one could tilt your portfolio towards large cap verse small cap. I don't have a strong opinion on which one will outperform, but many people do.

j0nnyg1984
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by j0nnyg1984 » Mon May 28, 2018 6:22 pm

I use VTSAX where I have the choice (tIRA, taxable) and VFINX where I don't have a choice (401k). No regrets either way.

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CyclingDuo
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by CyclingDuo » Mon May 28, 2018 6:27 pm

goshenBogle wrote:
Mon May 28, 2018 6:11 pm
We have been slowly moving our portfolio to more index funds and less actively managed funds. For our next move, we are trying to decide between the Vanguard Total Stock Market Index (VTSAX) and 500 Index (VFIAX). Their returns over the last 10 years are very similar. What rationale would we apply to decide in which of these two to invest?
Go with TSM as it captures everything. If one has a 401k/403b/457b plan that doesn't offer the TSM, you can approximate it using a small cap fund, or a small cap + mid cap fund, or the extended market fund.
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youngpleb
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by youngpleb » Mon May 28, 2018 7:38 pm

In case you weren't aware, the 500 Index composes about 80% of the total stock market index. By going with the total market, you'll get exposure to the smaller companies, which could be nice.
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Doctor Rhythm
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by Doctor Rhythm » Mon May 28, 2018 8:49 pm

Main determinant for me would be what's going on with the rest of the portfolio and what is needed to achieve your preferred balance. For example, if I were already too heavily tilted towards large cap, then I'd definitely go TSM so as not to make it worse.

danaht
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by danaht » Mon May 28, 2018 9:02 pm

If I had a choice - I would pick total stock market - since you get small and mid cap exposure too. My 401k only offers the institutional Vanguard S&P 500 fund - as the only index fund. So, I happily pick that one too, if given no choice. No complaints here.

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friar1610
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by friar1610 » Mon May 28, 2018 9:14 pm

As others have recommended, Total Stock has the advantage of being more diversified because it holds more stocks, including the smaller ones. Theoretically, it should be a tad more tax-efficient too. However, if you you look at a graph showing their relative performances there is virtually no difference over time. During the 2008 recession I TLH'd my S&P 500 fund and replaced it with with TSM. But if that "opportunity" had not presented itself I'm sure I wouldn't notice the difference.
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Slow FIRE
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by Slow FIRE » Mon May 28, 2018 9:38 pm

I will be the minority here, but i prefer the 500. This is because i prefer large cap and i do not like the idea of holding small companies that really should not be listed.

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ruralavalon
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by ruralavalon » Tue May 29, 2018 8:28 am

goshenBogle wrote:
Mon May 28, 2018 6:11 pm
We have been slowly moving our portfolio to more index funds and less actively managed funds. For our next move, we are trying to decide between the Vanguard Total Stock Market Index (VTSAX) and 500 Index (VFIAX). Their returns over the last 10 years are very similar. What rationale would we apply to decide in which of these two to invest?
I prefer Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) if available. If not available (such as in a 401k plan) then Vanguard 500 Index Fund Admiral Shares (VFIAX) is good enough by itself for domestic stocks in my opinion. An S&P 500 index fund covers 81% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies. As you noted the performance has been almost identical. In the 26 years since the creation of the first total stock market index fund the total return of the two types of funds has been almost identical. Morningstar, "growth of $10k" graph, VTSAX vs VFIAX.

The general preference for the total stock market index fund is because it is a little more diversified, but with the same expense ratio.
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vineviz
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by vineviz » Tue May 29, 2018 2:39 pm

goshenBogle wrote:
Mon May 28, 2018 6:11 pm
We have been slowly moving our portfolio to more index funds and less actively managed funds. For our next move, we are trying to decide between the Vanguard Total Stock Market Index (VTSAX) and 500 Index (VFIAX). Their returns over the last 10 years are very similar. What rationale would we apply to decide in which of these two to invest?
Other people can contributed some excellent theoretical reasons to choose VTSAX, but practically speaking there is virtually no difference.

Imagine an older version of you who had started investing in 1972 with $1,000 and added $100 a month (adjusted to keep up with inflation) to a portfolio that was maintained to be 80% stocks and 20% bonds.

If you'd put the stocks into a Total Market Index fund, you'd have $2,392,644 today. If you'd you'd put the stocks into S&P 500 Index fund, you'd have $2,383,722.

The difference in monthly income between those two retirement portfolios wouldn't cover the bill from a weekly trip to Starbucks for you and your wife.

In short, the additional stocks that VTSAX includes are included at such an incredibly low weight in the portfolio that the practical effect is likely to be almost nothing. The decision to add other diversification (e.g. small cap value or international stocks) or the overall bond/stock allocation are an order of magnitude more important.
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MotoTrojan
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by MotoTrojan » Tue May 29, 2018 2:49 pm

Slow FIRE wrote:
Mon May 28, 2018 9:38 pm
I will be the minority here, but i prefer the 500. This is because i prefer large cap and i do not like the idea of holding small companies that really should not be listed.
Small companies that should not be listed? These aren’t mom and pop companies. Many household names you use or can hear about every day are in the $1-$10B cap range.

Slow FIRE
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by Slow FIRE » Tue May 29, 2018 5:21 pm

I do not mean all small companies should not be listed. I simply meant there are some small companies that should not be listed. Hence i prefer the 500. At least there is some hurdles they have to clear before getting on the 500.

HoleInTheAir
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by HoleInTheAir » Tue May 29, 2018 5:34 pm

Both are great investments and would make a great core holding in a portfolio. As a poster above said, VTSAX doesn't have so much mid/small that it has a significant impact on returns against the S&P. If you think there's a benefit in small/mid cap companies, get the S&P 500 Index, and a small/mid cap index fund and make the split greater than VTSAX. VTSAX is about 73% large cap. Personally, I try to keep 60% of our domestic stock in large, and 40% in mid/small, so that's about 12% more mid/small than VTSAX uses. Over my investing life, if I can generate an additional 0.5-1.0% return, I'll be happy.

A basic three fund strategy using VTSAX is fantastic and will beat 90% or more of investors, but you don't have to limit yourself to that if you don't mind the complexity and rebalancing efforts to stay in line with whatever your plan is.

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Lancelot
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by Lancelot » Tue May 29, 2018 11:24 pm

youngpleb wrote:
Mon May 28, 2018 7:38 pm
In case you weren't aware, the 500 Index composes about 80% of the total stock market index. By going with the total market, you'll get exposure to the smaller companies, which could be nice.
That is why I am invested in Total Market, for the small cap exposure. Having said that, I think both funds are excellent choices. Do what make you happy :)
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JoMoney
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by JoMoney » Wed May 30, 2018 7:10 am

I prefer the S&P 500 index to the other market indices.

I like S&P's methodology for their index, which while aiming at representing the market, isn't just buying everything being sold. There are some restrictions on things like liquidity, financial viability, seasoning of IPOs, and a few other things.
I like the history of the index fund and the pedigree of the index itself and historical data.
I like that it was Vanguard's first index and it continues to track the same index (not that it changed much when Vanguard changed which index the TSM fund tracks.)
I like that the S&P 500 is the benchmark du jour. It's widely reported on, easy to verify that my fund is tracking the index, no "tracking error regret".
... and that there is lots of coverage and data available from S&P on things like earnings and buybacks and from other analysts with regard to the components and the index as a whole and it's current valuation etc...
I like that it is specifically the fund and index that Warren Buffett has suggested for a long time, and used in his "long bet" and for his bequest in trust for his wife.

...but, the "Total Market" index funds are close enough, so it's not a bad choice if you prefer those. My suggestion would be to go with the one that you think you'd be less likely to second guess on later.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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midareff
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by midareff » Wed May 30, 2018 7:15 am

I use Total in taxable and the 500 Index in my IRA based on that being slightly more tax efficient. I think at the end of the day it's 6 of one and a half dozen of the other.

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Earl Lemongrab
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by Earl Lemongrab » Wed May 30, 2018 1:03 pm

I use mostly S&P 500 ETFs. I have a slice and dice allocation so I prefer my large blend to be a bit more "pure" than total market.
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steve roy
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Re: Vanguard Total Stock Market Index vs 500 Index

Post by steve roy » Wed May 30, 2018 1:14 pm

Honestly? Six of one, half a dozen of the other.

Over a decade or two, you’ll end up in the same place.

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