Index allocation question.

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ancientone
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Index allocation question.

Post by ancientone » Thu Sep 13, 2018 4:24 pm

The basic three-basket portfolio includes the Vanguard Total Market Index fund. Vanguard also offers numerous index funds devoted to sectors of the domestic stock market. In particular, the S&P 500 fund and the Extended Market fund together cover the same ground as Total Market. What would be the returns if the domestic stock investment was divided equally between those two funds and rebalanced regularly? Suppose Extended Market was divided equally between Midcap and Small-Cap? And even those can be divided between growth and value. Without betraying the basic goal of using index funds and maintaining simplicity, would using more narrowly focused funds boost returns?

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David Jay
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Re: Index allocation question.

Post by David Jay » Thu Sep 13, 2018 7:12 pm

Welcome to the forum!

To answer your question, it is actually the other way around. If you only have access to a SP500 fund in your 401K then you can add some Extended Market in a personal account in order to get to the equivalent of Total Stock (81% SP500, 19% Extended). There is little advantage to holding the two funds instead of just holding Total Stock and your expense ratio will be higher because of the higher cost of Extended Market.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

HEDGEFUNDIE
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Re: Index allocation question.

Post by HEDGEFUNDIE » Thu Sep 13, 2018 7:16 pm

ancientone wrote:
Thu Sep 13, 2018 4:24 pm
Without betraying the basic goal of using index funds and maintaining simplicity, would using more narrowly focused funds boost returns?
Yes, some people here believe it would boost returns. It's called "slicing n' dicing" or "tilting". Typically one would overweight small caps and value stocks by using those component funds.

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Phineas J. Whoopee
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Re: Index allocation question.

Post by Phineas J. Whoopee » Thu Sep 13, 2018 7:43 pm

HEDGEFUNDIE wrote:
Thu Sep 13, 2018 7:16 pm
ancientone wrote:
Thu Sep 13, 2018 4:24 pm
Without betraying the basic goal of using index funds and maintaining simplicity, would using more narrowly focused funds boost returns?
Yes, some people here believe it would boost returns. It's called "slicing n' dicing" or "tilting". Typically one would overweight small caps and value stocks by using those component funds.
If I may add, the boost, if there is one, comes over very long periods of time, perhaps decades. If one wants to use a tilting strategy one has to commit for the long term, and not get discouraged after a year or ten of underperformance relative to a cap-weighted approach.

PJW

Thesaints
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Re: Index allocation question.

Post by Thesaints » Thu Sep 13, 2018 7:45 pm

Phineas J. Whoopee wrote:
Thu Sep 13, 2018 7:43 pm
If I may add, the boost, if there is one, comes over very long periods of time, perhaps decades. If one wants to use a tilting strategy one has to commit for the long term, and not get discouraged after a year or ten of underperformance relative to a cap-weighted approach.

PJW
People generally enjoy only a few decades of investing life.

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Phineas J. Whoopee
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Re: Index allocation question.

Post by Phineas J. Whoopee » Thu Sep 13, 2018 7:48 pm

Thesaints wrote:
Thu Sep 13, 2018 7:45 pm
Phineas J. Whoopee wrote:
Thu Sep 13, 2018 7:43 pm
If I may add, the boost, if there is one, comes over very long periods of time, perhaps decades. If one wants to use a tilting strategy one has to commit for the long term, and not get discouraged after a year or ten of underperformance relative to a cap-weighted approach.

PJW
People generally enjoy only a few decades of investing life.
And therfore what? Do you dispute my factual claim?

PJW

Thesaints
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Re: Index allocation question.

Post by Thesaints » Thu Sep 13, 2018 7:51 pm

No. Just saying I don't have 50-year bonds in my portfolio.

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Taylor Larimore
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Investing life ?

Post by Taylor Larimore » Thu Sep 13, 2018 7:55 pm

People generally enjoy only a few decades of investing life.
Bogleheads:

I believe this statement is incorrect. Most of us invest from the time we start work until we die which can be a very long time.

I started investing in 1950 at the age of 26. I am now 94. That is 68 years of investing.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Phineas J. Whoopee
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Re: Index allocation question.

Post by Phineas J. Whoopee » Thu Sep 13, 2018 7:57 pm

Thesaints wrote:
Thu Sep 13, 2018 7:51 pm
No. Just saying I don't have 50-year bonds in my portfolio.
The thread is about equities, not fixed income.

PJW

Thesaints
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Re: Index allocation question.

Post by Thesaints » Thu Sep 13, 2018 8:04 pm

Taylor Larimore wrote:
Thu Sep 13, 2018 7:55 pm
People generally enjoy only a few decades of investing life.
Bogleheads:

I believe this statement is incorrect. Most of us invest from the time we start work until we die which can be a very long time.

I started investing in 1950 at the age of 26. I am now 94. That is 68 years of investing.

Best wishes.
Taylor
Outcome of investments after you die is irrelevant. Outcome of investments when you are about to die is largely irrelevant.
Also, I'm not sure how much you invested at age 26, but investing peanuts does not yield millions, even after 100 years of typical market returns.
The bulk of what you can earn from financial markets, while still being able to enjoy it, is confined to a few decades of investing life.

Phineas J. Whoopee wrote:
Thu Sep 13, 2018 7:57 pm
Thesaints wrote:
Thu Sep 13, 2018 7:51 pm
No. Just saying I don't have 50-year bonds in my portfolio.
The thread is about equities, not fixed income.

PJW
It was a metaphor to signify that something which may come true forty years from now has scarce relevance for most present investors.
Someone else expressed the same concept way more eloquently: "In the long run we are all dead".

delamer
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Re: Index allocation question.

Post by delamer » Thu Sep 13, 2018 8:58 pm

HEDGEFUNDIE wrote:
Thu Sep 13, 2018 7:16 pm
ancientone wrote:
Thu Sep 13, 2018 4:24 pm
Without betraying the basic goal of using index funds and maintaining simplicity, would using more narrowly focused funds boost returns?
Yes, some people here believe it would boost returns. It's called "slicing n' dicing" or "tilting". Typically one would overweight small caps and value stocks by using those component funds.
And of course with the caveat that no one knows whether these tilts will improve performance in the future.

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David Jay
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Re: Index allocation question.

Post by David Jay » Thu Sep 13, 2018 10:54 pm

This thread may be getting away from the original poster’s question. Keep in mind that our new member is asking about dividing the market up into smaller “slices” with multiple funds, not tilting away from market weight.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

pkcrafter
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Re: Index allocation question.

Post by pkcrafter » Fri Sep 14, 2018 12:27 am

From 1988 to now, extended market has slightly beaten S&P500. Small cap has slightly outperformed both. This trend has continued, but for the last 8 years, the S&P500 has slightly beaten both. This is characteristic of smaller cap performance--some periods of not providing the premium. In the grand scheme of things, 8 years doesn't seem to much, but when you are experiencing it 8 years seems like a very long time.

If you want to tilt, use small cap value, and have great patience.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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jakehefty17
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Re: Index allocation question.

Post by jakehefty17 » Fri Sep 14, 2018 10:50 am

HEDGEFUNDIE wrote:
Thu Sep 13, 2018 7:16 pm
Yes, some people here believe it would boost returns. It's called "slicing n' dicing" or "tilting".
I slice-and-dice into small and mid cap equity indexes both foreign and domestic. Over the long term, it's reasonable to expect slightly higher returns with the added risk while maintaining a broad diversification. So long as you have the stomach stay the course. I have a 30+ year investment timeframe and enough risk tolerance to be comfortable with my strategy.

That said most Bogleheads prefer to keep things simple, and there's certainly merit to that. Asset allocation much is simpler with a 3 fund portfolio, especially when you're juggling multiple accounts (taxable/roth/pre-tax). Maintaining a slice-and-dice portfolio will take more effort.

Do whatever you're most comfortable with.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

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