Replicating Total Stock Market in a 401k?

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Topic Author
Tuesday
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Joined: Tue Jul 03, 2018 3:06 pm

Replicating Total Stock Market in a 401k?

Post by Tuesday » Fri May 22, 2020 9:28 am

I am a very young investor hoping to save for retirement in ~30 years. My goal is to create a "lazy portfolio" that requires minimal attention and captures the market as a whole. Something similar to 72% Total Stock Market, 18% Total International Stock Market, and 10% Total Bond seems about right.

My employer's 401k includes several Vanguard mutual funds to my delight. However, instead of Total Stock Market, Large Cap/Mid Cap/Small Cap are offered (VFIAX, VIMAX, VSMAX) individually; instead of Total International Market, Developed Markets/Emerging Markets are offered (VTMGX, VEMAX). Total Bond Market (VBTLX) is offered, so no issue there. All other funds offered are high cost.

Is it worth trying to use each of Large/Mid/Small cap in my 401k to replicate the total US market, or should I be content with SMP500? Similarly, is replicating crucial for International?

The more I think about it, the more I want to consider other options (use an IRA to invest with International funds!) some of which may not be horrible ideas, but considering too much distracts me from my desire to keep it simple.

My gut is telling me S&P500 is most likely sufficient and I should quit worrying about it (that is the goal of a lazy portfolio after all) but before I set it and forget it I'd like to hear other opinions first. Thank you.

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vineviz
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Re: Replicating Total Stock Market in a 401k?

Post by vineviz » Fri May 22, 2020 9:31 am

Tuesday wrote:
Fri May 22, 2020 9:28 am
I am a very young investor hoping to save for retirement in ~30 years. My goal is to create a "lazy portfolio" that requires minimal attention and captures the market as a whole. Something similar to 72% Total Stock Market, 18% Total International Stock Market, and 10% Total Bond seems about right.

My employer's 401k includes several Vanguard mutual funds to my delight. However, instead of Total Stock Market, Large Cap/Mid Cap/Small Cap are offered (VFIAX, VIMAX, VSMAX) individually; instead of Total International Market, Developed Markets/Emerging Markets are offered (VTMGX, VEMAX). Total Bond Market (VBTLX) is offered, so no issue there. All other funds offered are high cost.

Is it worth trying to use each of Large/Mid/Small cap in my 401k to replicate the total US market, or should I be content with SMP500? Similarly, is replicating crucial for International?

The more I think about it, the more I want to consider other options (use an IRA to invest with International funds!) some of which may not be horrible ideas, but considering too much distracts me from my desire to keep it simple.

My gut is telling me S&P500 is most likely sufficient and I should quit worrying about it (that is the goal of a lazy portfolio after all) but before I set it and forget it I'd like to hear other opinions first. Thank you.
Do you have access to Vanguard target retirement funds in your 401k? If so, it's a far superior choice to any cobbled-together selection of funds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Tamarind
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Re: Replicating Total Stock Market in a 401k?

Post by Tamarind » Fri May 22, 2020 9:35 am

You certainly can set your 401k to buy the component funds in proportion to reproduce total stock market. There's a page in the wiki that gives the rough percentages.

Another option is if you are also investing in a Roth IRA or taxable account to buy VEXAX - Vanguard Extended Market - that is everything from TSM except for the S&P500.

It is also fine as you are getting started to just buy S&P500. It won't make as much difference until you have more invested, at which time you'll also have more options.

Any of the above are fine. Your savings rate has much more effect on your results right now than this.

Topic Author
Tuesday
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Re: Replicating Total Stock Market in a 401k?

Post by Tuesday » Fri May 22, 2020 9:47 am

Tamarind, I will find the percentages on the wiki. I remember seeing this, thank you for reminding me. VEXAX also looks to be useful for me.

vineviz, the only target date retirement funds offered are American Funds with .4% expense ratios. They tend to give me the feeling of being out of control as I could not tell someone what it includes year to year, and I doubt my ability to stay the course with one. I'm open to feedback though.

I do hope to focus mostly on savings rate. Right now, I allocate 23% of my income into a Roth 401k and I hope to increase over time (my career path has a salary that grows more rapidly than most). I appreciate the reminder to focus on savings rate first.

retired@50
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Re: Replicating Total Stock Market in a 401k?

Post by retired@50 » Fri May 22, 2020 11:39 am

Tuesday wrote:
Fri May 22, 2020 9:47 am
...
Right now, I allocate 23% of my income into a Roth 401k
...
Since you're using a Roth 401k, you should probably read the wiki page that discusses whether to use a traditional 401k or a Roth 401k. See link below. Many people misunderstand this important decision. Depending on your current tax bracket (both Federal and State) you might be better off using the traditional 401k plan. To add money to a Roth account, you could consider using a Roth IRA that isn't affiliated with your workplace plan.

https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
This is one person's opinion. Nothing more.

retiredjg
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Re: Replicating Total Stock Market in a 401k?

Post by retiredjg » Fri May 22, 2020 11:59 am

Tuesday wrote:
Fri May 22, 2020 9:28 am
Is it worth trying to use each of Large/Mid/Small cap in my 401k to replicate the total US market, or should I be content with SMP500? Similarly, is replicating crucial for International?
500 index is probably good enough, but if you want to use mid/small too, go to the Wiki and type approx into the search box and you will find pages that tell you how to get what you want for both total stock and total international.

I would be happy with 500 index, but would not want to forgo emerging unless I had to.

Swivelguy
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Re: Replicating Total Stock Market in a 401k?

Post by Swivelguy » Fri May 22, 2020 12:01 pm

The S&P500 is about 80% of the US market, so if we defer to the axiom that "a tilt of less than 5% is insignificant," then the extended market, being almost 20%, is a significant thing to be missing. It's only a few clicks to set up the funds in the 401k, so why not do it?

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

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ruralavalon
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Re: Replicating Total Stock Market in a 401k?

Post by ruralavalon » Fri May 22, 2020 12:11 pm

Tuesday wrote:
Fri May 22, 2020 9:28 am
I am a very young investor hoping to save for retirement in ~30 years. My goal is to create a "lazy portfolio" that requires minimal attention and captures the market as a whole. Something similar to 72% Total Stock Market, 18% Total International Stock Market, and 10% Total Bond seems about right.

My employer's 401k includes several Vanguard mutual funds to my delight. However, instead of Total Stock Market, Large Cap/Mid Cap/Small Cap are offered (VFIAX, VIMAX, VSMAX) individually; instead of Total International Market, Developed Markets/Emerging Markets are offered (VTMGX, VEMAX). Total Bond Market (VBTLX) is offered, so no issue there. All other funds offered are high cost.

Is it worth trying to use each of Large/Mid/Small cap in my 401k to replicate the total US market, or should I be content with SMP500? Similarly, is replicating crucial for International?

The more I think about it, the more I want to consider other options (use an IRA to invest with International funds!) some of which may not be horrible ideas, but considering too much distracts me from my desire to keep it simple.

My gut is telling me S&P500 is most likely sufficient and I should quit worrying about it (that is the goal of a lazy portfolio after all) but before I set it and forget it I'd like to hear other opinions first. Thank you.
A good target date fund would be suitable if offered, and much simpler.

In my opinion in a 401k plan which lacks a total stock market index fund a S&P 500 index fund is good enough by itself for investing in U.S. stocks. A S&P 500 index fund covers over 80% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies. In the 28 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance. Portfolio Visualizer,1993-2020.

If you want to add some Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) then an 84/16 mix of the S&P 500 and small cap index funds will mimic the content of a total stock market index fund. Wiki article"Approximating Total Stock Market" . In my opinion that is not necessary, it is optional if you prefer to do that.

I have not really considered the issue of using just Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) by itself without emerging markets. The developed markets index fund has had similar performance to the total international stock index fund, but with significant differences at times. Portfolio Visualizer, 2000-2020.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
Tuesday
Posts: 4
Joined: Tue Jul 03, 2018 3:06 pm

Re: Replicating Total Stock Market in a 401k?

Post by Tuesday » Fri May 22, 2020 1:02 pm

I appreciate all the replies so far, they are very valuable. I have not seen portfoliovisualizer before.

I am leaning towards 84% Large cap and 16% small cap to mimic TSM, as has been suggested. International is a slightly trickier issue.

The approximating international portfolio suggested on the wiki (https://www.bogleheads.org/wiki/Approxi ... ock_market) includes some funds I don't have access to, but the 3:1 ratio of Developed:Emerging is something I could easily set up. Or, just use an IRA and use whatever I wanted.

I would be mostly happy with Vanguard's target retirement date funds, but I do not have access to them with my employer. Again, an IRA could be a solution here.

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