Which combination best approximates total US market?

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Abarn
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Joined: Sun Mar 10, 2019 1:39 am

Which combination best approximates total US market?

Post by Abarn » Tue Apr 16, 2019 4:14 am

I'm trying to determine my best option for approximating the total US stock market with the available funds in my 403(b). If you could choose would you use:

A) 81% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
4% Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
15% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

B) 82% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
18% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

C) It doesn't matter, these combinations are equivalent

One thing I've been wondering, if both A and B effectively approximate the total US market how is this so? Is it simply that the 4% mid-cap fund is negligible in the grand scheme of things?

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FiveK
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Re: Which combination best approximates total US market?

Post by FiveK » Tue Apr 16, 2019 4:29 am

Appears you used Approximating total stock market - Bogleheads for those numbers.

As displayed there, "it doesn't matter," at least based on the comparisons using Morningstar's style boxes.

typical.investor
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Re: Which combination best approximates total US market?

Post by typical.investor » Tue Apr 16, 2019 4:44 am

[Dec 2001 - Mar 2019]
[Based on the available data (Dec 2001 - Mar 2019) for: Vanguard Mid Cap Index Admiral (VIMAX)]

A) 81% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
4% Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
15% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

8.01% CAGR

B) 82% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
18% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

7.99% CAGR

The future is unknown but I'd say it doesn't matter.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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nisiprius
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Re: Which combination best approximates total US market?

Post by nisiprius » Tue Apr 16, 2019 6:48 am

Abarn wrote:
Tue Apr 16, 2019 4:14 am
I'm trying to determine my best option for approximating the total US stock market with the available funds in my 403(b). If you could choose would you use:

A) 81% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
4% Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
15% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

B) 82% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
18% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

C) It doesn't matter, these combinations are equivalent

One thing I've been wondering, if both A and B effectively approximate the total US market how is this so? Is it simply that the 4% mid-cap fund is negligible in the grand scheme of things?
They aren't really "equivalent" in a strict sense--but it doesn't matter.

Here's how your two combinations have behaved in the past.
Portfolio 1 is your portfolio A (blue), 81%, 4%, 15%.
Portfolio 2 is your portfolio B (red), 82%, 18%.

Source

Image

The reasons why it didn't matter are:
  • The large-, mid-, and small-cap categories are arbitrary. Don't believe there is some fundamental bright-line difference.
  • The behavior of small-caps and mid-caps is very similar. The big difference is between large-caps and everything else.
  • The VIIIX, which tracks the S&P 500, isn't a pure large-cap fund; it contains about 12% mid-caps.
  • And VSCIX is actually about 60% mid-cap, 40% small-cap.
The correlations between the S&P 500, mid-caps, and small-caps have looked like this (I used VIMSX instead of VIMAX to get a long period of history, it's the same mid-cap fund but the original "investor" share class):

Image

As you see, the small-caps and mid-cap funds had an 0.96 correlation. That's actually about as close to a perfect correlation as you'll ever get. That means that the pattern of ups and downs matched almost exactly. That, in turn, means that one of them might be a stronger or more intense dose of the same thing than the other, but basically there was no other difference.

Everyone has their personal approach. Speaking for myself, the self-interests of people selling things is to exaggerate the importance of the tiniest differences, in order to give you a reason to prefer their product over another. And, because money is involved, people start to obsess over the possible importance of small differences and an urge to optimize. I think it is best to throw in the towel at the beginning and admit that you can't do more than be sensible and try to avoid big mistakes. The biggest mistake is to let yourself get psyched into constantly making changes in one's portfolio. A little bit of deliberate sloppiness helps, to remind yourself that you don't need to change your portfolio because you never tried to make it perfect, anyway.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

3funder
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Joined: Sun Oct 15, 2017 9:35 pm

Re: Which combination best approximates total US market?

Post by 3funder » Tue Apr 16, 2019 7:40 am

typical.investor wrote:
Tue Apr 16, 2019 4:44 am
[Dec 2001 - Mar 2019]
[Based on the available data (Dec 2001 - Mar 2019) for: Vanguard Mid Cap Index Admiral (VIMAX)]

A) 81% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
4% Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
15% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

8.01% CAGR

B) 82% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
18% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

7.99% CAGR

The future is unknown but I'd say it doesn't matter.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
+1

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