SP500 Index fund will outperform total stock market?

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Mode32
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SP500 Index fund will outperform total stock market?

Post by Mode32 » Thu Mar 26, 2020 3:40 pm

https://www.marketwatch.com/story/coron ... =home-page


Although I’ve been investing for a while, I’m fairly new at critically reviewing investment articles. Above is a recent article from MarketWatch.com.

It basically says the five stocks (Microsoft, Amazon, Facebook, Alphabet, and Google) with the largest market capitalizations have outperformed the market since this economic downturn in Feb ‘20 with a high likelihood that there will be a “long-term shift: The stock market is becoming split between a few large firms that are wildly profitable and everything else.” The articles goes on to recommend investing in broad market index funds (which I already do like most of us on this site).

Of course, every article has its own bias, but could this article be further interpreted to mean that an S&P 500 specific Index fund (VFIAX) would likely outperform a Total Stock Market Index fund (VTSAX) because the weights given to the above five companies within the VFIAX are higher? I understand that the performance of VFIAX vs VTSAK is very similar, but would like to hear how seasoned investors may look at this.

Thanks in advance.

Stay safe and healthy.

alex_686
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Re: SP500 Index fund will outperform total stock market?

Post by alex_686 » Thu Mar 26, 2020 3:46 pm

Hard to tell what the future will bring but the past 20 years have favored larger corporations. Partly thanks to to technology, networking and increasing complex regulations.

Could things shift? Maybe. In my part of the land micro-breweries are taking a huge bit out of the macro-breweries. However, you can only buy shares in the multinational breweries, not the local family owned brewers. Private equities have been buying all of the good small cap publicly traded companies. I could go on.

Edit: I though this was a discussion between a large cap and a total market funds. Whoops. That changes things a bit.
Last edited by alex_686 on Thu Mar 26, 2020 4:11 pm, edited 1 time in total.

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White Coat Investor
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Re: SP500 Index fund will outperform total stock market?

Post by White Coat Investor » Thu Mar 26, 2020 3:49 pm

Nifty Fifty all over again?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Ferdinand2014
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Re: SP500 Index fund will outperform total stock market?

Post by Ferdinand2014 » Thu Mar 26, 2020 3:51 pm

For all practical purposes the TSM is the S&P 500. By definition, the top 5 or 10 stocks always dominate. That’s how market cap works. The difference between the S&P 500 and a TSM fund is essentially noise over the last 100 years. Currently the top 10 represent about 21% of an S&P 500 index fund and 18% in a total stock index fund. The article is as stupid as they come. Full disclosure, I own all of my equities in a S&P 500 index fund and do not expect it to outperform the TSM.

https://awealthofcommonsense.com/2020/0 ... tors-care/

“It’s important to remember that concentration in stock market gains in the S&P 500 is a feature, not a bug. In a market-cap-weighted index, the majority of the gains will invariably come from the largest names. This doesn’t mean smaller stocks aren’t participating in the rally, just that they don’t move the needle for the overall market.”

“While the 25% concentration in the top 10 names today feels high, that’s right where it was in 1980. And the market was even more concentrated if we take things further back. In 1965, AT&T made up nearly 8% of the index. General Motors was another 7%. The top 10 holdings were 34% of the S&P 500. In the early 1960s the top 10 holdings at one time made up over 50% of the S&P!”

Ben Carson - A wealth of Common Sense
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

k1982
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Re: SP500 Index fund will outperform total stock market?

Post by k1982 » Thu Mar 26, 2020 3:54 pm

it doesn't matter which you chose..both are GREAT funds

the question is whether you decide to go all domestic stock? or dip into the int'l market too? that is the bigger question here

some prefer 100% domestic like me

others go 80% domestic 20% int'l

and then you have many brokerage firms recommending 60/40

GeraniumLover
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Re: SP500 Index fund will outperform total stock market?

Post by GeraniumLover » Thu Mar 26, 2020 4:00 pm

Mode32 wrote:
Thu Mar 26, 2020 3:40 pm

It basically says the five stocks (Microsoft, Amazon, Facebook, Alphabet, and Google) with the largest market capitalizations have outperformed the market since this economic downturn in Feb ‘20 with a high likelihood that there will be a “long-term shift: The stock market is becoming split between a few large firms that are wildly profitable and everything else.”
Alphabet and Google are one and the same. The article includes Apple as the fifth stock.

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Mode32
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Re: SP500 Index fund will outperform total stock market?

Post by Mode32 » Thu Mar 26, 2020 4:07 pm

Ferdinand2014 wrote:
Thu Mar 26, 2020 3:51 pm
For all practical purposes the TSM is the S&P 500. By definition, the top 5 or 10 stocks always dominate. That’s how market cap works. The difference between the S&P 500 and a TSM fund is essentially noise over the last 100 years. Currently the top 10 represent about 21% of an S&P 500 index fund and 18% in a total stock index fund. The article is as stupid as they come. Full disclosure, I own all of my equities in a S&P 500 index fund and do not expect it to outperform the TSM.

https://awealthofcommonsense.com/2020/0 ... tors-care/

“It’s important to remember that concentration in stock market gains in the S&P 500 is a feature, not a bug. In a market-cap-weighted index, the majority of the gains will invariably come from the largest names. This doesn’t mean smaller stocks aren’t participating in the rally, just that they don’t move the needle for the overall market.”

“While the 25% concentration in the top 10 names today feels high, that’s right where it was in 1980. And the market was even more concentrated if we take things further back. In 1965, AT&T made up nearly 8% of the index. General Motors was another 7%. The top 10 holdings were 34% of the S&P 500. In the early 1960s the top 10 holdings at one time made up over 50% of the S&P!”

Ben Carson - A wealth of Common Sense
Doesn’t having “the top 10 represent about 21% of an S&P 500 index fund and 18% in a total stock index fund” theoretically result in the S&P500 index fund outperforming the Total Stock Market Index fund ever so slightly (if the top five companies continue to dominate the market as per the article)?

Ferdinand2014
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Re: SP500 Index fund will outperform total stock market?

Post by Ferdinand2014 » Thu Mar 26, 2020 4:23 pm

Mode32 wrote:
Thu Mar 26, 2020 4:07 pm
Ferdinand2014 wrote:
Thu Mar 26, 2020 3:51 pm
For all practical purposes the TSM is the S&P 500. By definition, the top 5 or 10 stocks always dominate. That’s how market cap works. The difference between the S&P 500 and a TSM fund is essentially noise over the last 100 years. Currently the top 10 represent about 21% of an S&P 500 index fund and 18% in a total stock index fund. The article is as stupid as they come. Full disclosure, I own all of my equities in a S&P 500 index fund and do not expect it to outperform the TSM.

https://awealthofcommonsense.com/2020/0 ... tors-care/

“It’s important to remember that concentration in stock market gains in the S&P 500 is a feature, not a bug. In a market-cap-weighted index, the majority of the gains will invariably come from the largest names. This doesn’t mean smaller stocks aren’t participating in the rally, just that they don’t move the needle for the overall market.”

“While the 25% concentration in the top 10 names today feels high, that’s right where it was in 1980. And the market was even more concentrated if we take things further back. In 1965, AT&T made up nearly 8% of the index. General Motors was another 7%. The top 10 holdings were 34% of the S&P 500. In the early 1960s the top 10 holdings at one time made up over 50% of the S&P!”

Ben Carson - A wealth of Common Sense
Doesn’t having “the top 10 represent about 21% of an S&P 500 index fund and 18% in a total stock index fund” theoretically result in the S&P500 index fund outperforming the Total Stock Market Index fund ever so slightly (if the top five companies continue to dominate the market as per the article)?
No it does not. I am a big fan of using an S&P 500 index fund, but for none of the reasons suggested. Read the article that I linked and note the dynamic changes that occur over decades. It is highly likely that what dominates now will not dominate in 20 years. This is what capitalism is all about.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Mode32
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Re: SP500 Index fund will outperform total stock market?

Post by Mode32 » Thu Mar 26, 2020 4:36 pm

But wouldn’t the S&P 500 index fund have a larger % of the top 10 companies (at whatever time/companies in future)compared with a Total stock market fund, and therefore perform slightly better?

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ruralavalon
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Re: SP500 Index fund will outperform total stock market?

Post by ruralavalon » Thu Mar 26, 2020 4:37 pm

Mode32 wrote:
Thu Mar 26, 2020 3:40 pm
https://www.marketwatch.com/story/coron ... =home-page


Although I’ve been investing for a while, I’m fairly new at critically reviewing investment articles. Above is a recent article from MarketWatch.com.

It basically says the five stocks (Microsoft, Amazon, Facebook, Alphabet, and Google) with the largest market capitalizations have outperformed the market since this economic downturn in Feb ‘20 with a high likelihood that there will be a “long-term shift: The stock market is becoming split between a few large firms that are wildly profitable and everything else.” The articles goes on to recommend investing in broad market index funds (which I already do like most of us on this site).

Of course, every article has its own bias, but could this article be further interpreted to mean that an S&P 500 specific Index fund (VFIAX) would likely outperform a Total Stock Market Index fund (VTSAX) because the weights given to the above five companies within the VFIAX are higher? I understand that the performance of VFIAX vs VTSAK is very similar, but would like to hear how seasoned investors may look at this.

Thanks in advance.

Stay safe and healthy.
Maybe, maybe not. I would not want to guess. We use Vanguard Total Stock Market Index Fund (VTSAX), and don't plan to switch.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Northern Flicker
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Re: SP500 Index fund will outperform total stock market?

Post by Northern Flicker » Thu Mar 26, 2020 4:40 pm

Mode32 wrote: It basically says the five stocks (Microsoft, Amazon, Facebook, Alphabet, and Google) with the largest market capitalizations have outperformed the market since this economic downturn in Feb ‘20 with a high likelihood that there will be a “long-term shift: The stock market is becoming split between a few large firms that are wildly profitable and everything else.”
Large-cap stocks tend to do better than small-caps in a downturn because they tend to have less debt load, tend to have more cash on hand, and tend to have better credit ratings if they do need to borrow, among other things. Large-caps tend to be better able to weather a storm like this. As a result, when the market prices in bigger risk premia in times like this (discounts the price of a stock to reflect greater future uncertainty of revenue) the discounting will tend to be steeper for small-cap stocks.

What has happened since Feb 20 is pretty irrelevant to the long-term trajectory, whether or not the prediction of a long-term trend turns out to be correct.
Last edited by Northern Flicker on Thu Mar 26, 2020 4:57 pm, edited 1 time in total.
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Re: SP500 Index fund will outperform total stock market?

Post by watchnerd » Thu Mar 26, 2020 4:47 pm

Mode32 wrote:
Thu Mar 26, 2020 3:40 pm
https://www.marketwatch.com/story/coron ... =home-page


Although I’ve been investing for a while, I’m fairly new at critically reviewing investment articles. Above is a recent article from MarketWatch.com.

It basically says the five stocks (Microsoft, Amazon, Facebook, Alphabet, and Google) with the largest market capitalizations have outperformed the market since this economic downturn in Feb ‘20 with a high likelihood that there will be a “long-term shift: The stock market is becoming split between a few large firms that are wildly profitable and everything else.” The articles goes on to recommend investing in broad market index funds (which I already do like most of us on this site).

Of course, every article has its own bias, but could this article be further interpreted to mean that an S&P 500 specific Index fund (VFIAX) would likely outperform a Total Stock Market Index fund (VTSAX) because the weights given to the above five companies within the VFIAX are higher? I understand that the performance of VFIAX vs VTSAK is very similar, but would like to hear how seasoned investors may look at this.

Thanks in advance.

Stay safe and healthy.
I already work for one of the tech megacorps, so not only is my job/salary tied to this market segment, but also my ESPP and RSUs.

This is why I invest in Total World Stock -- to diversify *away* from the US mega tech sector.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: SP500 Index fund will outperform total stock market?

Post by arcticpineapplecorp. » Thu Mar 26, 2020 4:53 pm

compare the largest holdings between the S&P500 and the total stock market index fund:

Image

Image

do you notice any difference?

the only difference is the 10 largest companies make up 24.80% of the S&P500 index, whereas the 10 largest companies "only" make up 20.70% of the total stock market index fund (and whether amazon or alphabet make up a larger percentage of holdings).

when you're talking about a percentage in U.S. stocks, a percentage in International stocks (hopefully) and a percentage in U.S. Bonds, don't you think a 4.1% difference in your stock portion (held in these 10 companies) accounts for very little overall difference in returns?

pick your poison.
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Re: SP500 Index fund will outperform total stock market?

Post by Jags4186 » Thu Mar 26, 2020 4:59 pm

alex_686 wrote:
Thu Mar 26, 2020 3:46 pm
Hard to tell what the future will bring but the past 20 years have favored larger corporations. Partly thanks to to technology, networking and increasing complex regulations.
Small caps have trounced large caps over the last 20 years:

Annualized Returns

Vanguard SP500 Index 2000-2019: 5.94%
Vanguard Small Cap Index 2000-2019: 8.43%

Even considering the relative poor performance of small caps in 2020, small caps are well ahead of large caps since 2000.

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Re: SP500 Index fund will outperform total stock market?

Post by ruralavalon » Thu Mar 26, 2020 5:05 pm

Jags4186 wrote:
Thu Mar 26, 2020 4:59 pm
alex_686 wrote:
Thu Mar 26, 2020 3:46 pm
Hard to tell what the future will bring but the past 20 years have favored larger corporations. Partly thanks to to technology, networking and increasing complex regulations.
Small caps have trounced large caps over the last 20 years:

Annualized Returns

Vanguard SP500 Index 2000-2019: 5.94%
Vanguard Small Cap Index 2000-2019: 8.43%

Even considering the relative poor performance of small caps in 2020, small caps are well ahead of large caps since 2000.
It is hard to see much difference in historical performance between Vanguard 500 Index Fund and Vanguard Total Stock Market Index Fund. Portfolio Visualizer, 1993-2020.

After all small-caps make up a only small part (instant xray) of a total stock market index fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: SP500 Index fund will outperform total stock market?

Post by tibbitts » Thu Mar 26, 2020 5:32 pm

Mode32 wrote:
Thu Mar 26, 2020 3:40 pm
https://www.marketwatch.com/story/coron ... =home-page


Although I’ve been investing for a while, I’m fairly new at critically reviewing investment articles. Above is a recent article from MarketWatch.com.

It basically says the five stocks (Microsoft, Amazon, Facebook, Alphabet, and Google) with the largest market capitalizations have outperformed the market since this economic downturn in Feb ‘20 with a high likelihood that there will be a “long-term shift: The stock market is becoming split between a few large firms that are wildly profitable and everything else.” The articles goes on to recommend investing in broad market index funds (which I already do like most of us on this site).

Of course, every article has its own bias, but could this article be further interpreted to mean that an S&P 500 specific Index fund (VFIAX) would likely outperform a Total Stock Market Index fund (VTSAX) because the weights given to the above five companies within the VFIAX are higher? I understand that the performance of VFIAX vs VTSAK is very similar, but would like to hear how seasoned investors may look at this.

Thanks in advance.

Stay safe and healthy.
I don't know how "seasoned" investors look at this, but personally it would be hard to find something I believe is less important than the difference between the S&P500 and the Total Market.

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Re: SP500 Index fund will outperform total stock market?

Post by hulburt1 » Thu Mar 26, 2020 5:52 pm

If I put 1m in the top 5 equally and 1m in s&p and 1m in total-Which one would be ahead in 5 years?

$questions
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Re: SP500 Index fund will outperform total stock market?

Post by $questions » Thu Mar 26, 2020 6:10 pm

Do you have any invest in the ETF RSP? It's an equal weighted market cap ETF for S&P 500?

Triple digit golfer
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Re: SP500 Index fund will outperform total stock market?

Post by Triple digit golfer » Thu Mar 26, 2020 6:12 pm

I used to have most of my U.S. equities in total market. Now most are in the S&P 500. I don't know that there's anything less important in investing than distinguishing between the two.

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Re: SP500 Index fund will outperform total stock market?

Post by Jags4186 » Thu Mar 26, 2020 6:16 pm

ruralavalon wrote:
Thu Mar 26, 2020 5:05 pm
Jags4186 wrote:
Thu Mar 26, 2020 4:59 pm
alex_686 wrote:
Thu Mar 26, 2020 3:46 pm
Hard to tell what the future will bring but the past 20 years have favored larger corporations. Partly thanks to to technology, networking and increasing complex regulations.
Small caps have trounced large caps over the last 20 years:

Annualized Returns

Vanguard SP500 Index 2000-2019: 5.94%
Vanguard Small Cap Index 2000-2019: 8.43%

Even considering the relative poor performance of small caps in 2020, small caps are well ahead of large caps since 2000.
It is hard to see much difference in historical performance between Vanguard 500 Index Fund and Vanguard Total Stock Market Index Fund. Portfolio Visualizer, 1993-2020.

After all small-caps make up a only small part (instant xray) of a total stock market index fund.
I wasn't commenting on the TSM vs the SP500. For all intents and purposes, they perform near identically.

aristotelian
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Re: SP500 Index fund will outperform total stock market?

Post by aristotelian » Thu Mar 26, 2020 6:18 pm

The academic literature says there is a "size premium" for smaller companies which are theoretically higher risk, higher reward. The reward hasn't been there in recent years but could come back. Again theoretically, any group of stocks that outperforms will become overvalued and will underperform in the future. The problem is any of these theories can be true depending on what timeframe you pick, and even if there is a historical trend, future performance is never guaranteed.

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Phineas J. Whoopee
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Re: SP500 Index fund will outperform total stock market?

Post by Phineas J. Whoopee » Thu Mar 26, 2020 6:32 pm

The S&P 500 represents approximately 80% of the market capitalization of the total US stock market. Therefore, they will track each other closely.

If you want to outperform the total US stock market, on a capitalization-weighted basis, you'll have to deviate from it much more than just the S&P 500. Of course you will risk underperforming. That, to use a cliche, is what risk means.

What are you trying to accomplish? With the information we might be able to provide more specific guidance.

PJW

rasta
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Re: SP500 Index fund will outperform total stock market?

Post by rasta » Thu Mar 26, 2020 7:40 pm

likely QQQ will beat both VOO and VTI.

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ruralavalon
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Re: SP500 Index fund will outperform total stock market?

Post by ruralavalon » Thu Mar 26, 2020 8:40 pm

Jags4186 wrote:
Thu Mar 26, 2020 6:16 pm
ruralavalon wrote:
Thu Mar 26, 2020 5:05 pm
Jags4186 wrote:
Thu Mar 26, 2020 4:59 pm
alex_686 wrote:
Thu Mar 26, 2020 3:46 pm
Hard to tell what the future will bring but the past 20 years have favored larger corporations. Partly thanks to to technology, networking and increasing complex regulations.
Small caps have trounced large caps over the last 20 years:

Annualized Returns

Vanguard SP500 Index 2000-2019: 5.94%
Vanguard Small Cap Index 2000-2019: 8.43%

Even considering the relative poor performance of small caps in 2020, small caps are well ahead of large caps since 2000.
It is hard to see much difference in historical performance between Vanguard 500 Index Fund and Vanguard Total Stock Market Index Fund. Portfolio Visualizer, 1993-2020.

After all small-caps make up a only small part (instant xray) of a total stock market index fund.
I wasn't commenting on the TSM vs the SP500. For all intents and purposes, they perform near identically.
I was trying to stick to the original question which is "SP500 Index fund will outperform total stock market?"

Turning to your point, long-term Vanguard 500 Index Fund has had better total return than Vanguard Small-cap Fund.
S&P 500 = 10.89% CAGR
Small-cap = 9.81% CAGR

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ruralavalon
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Re: SP500 Index fund will outperform total stock market?

Post by ruralavalon » Thu Mar 26, 2020 8:48 pm

rasta wrote:
Thu Mar 26, 2020 7:40 pm
likely QQQ will beat both VOO and VTI.
"Likely"??? Historical returns are otherwise.

The more diversified funds, S&P 500 and total stock market, have had better CAGR (Compound annual growth rate) than Invesco QQQ Trust (QQQ). Portfolio Visualizer, 2000-2020
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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1789
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Re: SP500 Index fund will outperform total stock market?

Post by 1789 » Thu Mar 26, 2020 11:36 pm

ruralavalon wrote:
Thu Mar 26, 2020 8:48 pm
rasta wrote:
Thu Mar 26, 2020 7:40 pm
likely QQQ will beat both VOO and VTI.
"Likely"??? Historical returns are otherwise.

The more diversified funds, S&P 500 and total stock market, have had better CAGR (Compound annual growth rate) than Invesco QQQ Trust (QQQ). Portfolio Visualizer, 2000-2020
QQQ is horrible. I don't understand why anyone invests in that fund honestly.
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Re: SP500 Index fund will outperform total stock market?

Post by drk » Fri Mar 27, 2020 12:07 am

The jump from "did" to "will" is illogical.

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Mode32
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Re: SP500 Index fund will outperform total stock market?

Post by Mode32 » Fri Mar 27, 2020 2:20 pm

Phineas J. Whoopee wrote:
Thu Mar 26, 2020 6:32 pm
The S&P 500 represents approximately 80% of the market capitalization of the total US stock market. Therefore, they will track each other closely.

If you want to outperform the total US stock market, on a capitalization-weighted basis, you'll have to deviate from it much more than just the S&P 500. Of course you will risk underperforming. That, to use a cliche, is what risk means.

What are you trying to accomplish? With the information we might be able to provide more specific guidance.

PJW
I was under the impression that a total stock market index fund has and will (in the future) very slightly outperform the S&P 500 index fund. Of course, can't predict future performance, and I had not seen before an article expecting the S&P 500 index fund to outperform the total stock market fund...so just wanted to get experienced investors thoughts on the article and who they would give the ever so slight edge to (TSM vs SP500).

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cheese_breath
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Re: SP500 Index fund will outperform total stock market?

Post by cheese_breath » Fri Mar 27, 2020 2:22 pm

Whichever one wins, the difference will be negligible.
The surest way to know the future is when it becomes the past.

bigfry
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Re: SP500 Index fund will outperform total stock market?

Post by bigfry » Fri Mar 27, 2020 2:37 pm

They are for all intents and purposes the same. VTSAX and VFIAX are both very good funds and great TLH partners as well. I just recently exchanged all my VTSAX shares for VFIAX for tax-loss purposes. They are "different" enough in the eyes of the IRS that they will not trigger a wash sale. However in a taxable account it appears VFIAX is slightly more efficient because it produces 100% qualified dividends while VTSAX is 93.79%. Something to consider.
Keep it simple, stupid.

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