Mel's unloved midcaps

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fundtalk
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Mel's unloved midcaps

Post by fundtalk » Sat Jan 12, 2008 10:54 am

I was reading some old messages from the other forum. In approximately 2000 there was the original Mel's Unloved Midcaps message. In this thread Mel presented his theory about Midcaps. I'll try to get this straight, but Mel or any others please correct me if I'm wrong.

My understanding of the conversation was that if you're going to tilt to small cap stocks, rather than holding the traditional barbell portfolio (50% LC index/ 50% SC index), an investor may be better off actually simply holding the midcap index instead. The midcaps over the previous 15 years of data, had better risk/return over that time frame ("the sweet spot".) In practice this has held up remarkably well with a mid cap portfolio performing better than a 50/50 portfolio, and pretty much any other combination.

I believe Mel has stated that his entire domestic portfolio is in midcaps. I don't seem to recall any other investors taking that position. Obviously, it seems strange holding such a narrow portfolio compared to TSM. So, I was wondering.....
1) Do any other investors have midcap only portfolios?
2) What are the arguements against a midcap only portfolio?
3) Mel, any other input or thoughts?

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Mid Caps

Post by Petrocelli » Sat Jan 12, 2008 11:03 am

I don't have a mid-cap only portfolio. However, my Vanguard equities contain about 20% in Selected Value and 20% in Cap. Opp.

Keep in mind that although midcaps look pretty good now, they have gone on a nice run. I don't think they did as well in the 1990s. What will happen over the next 10 years is anyone's guess.
Petrocelli (not the real Rico, but just a fan)

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Post by NAVigator » Sat Jan 12, 2008 11:29 am

I have about two thirds of my equities in Midcaps including MC growth. TrevH has posted about the mid-cap performance, including;

Those Mid Caps...

The following post gives performance over various time periods.

1927-2005 Performance by Cap Size

Jerry
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Mel's Unloved Mid-Caps

Post by Mel Lindauer » Sat Jan 12, 2008 12:12 pm

Petrocelli wrote:I don't have a mid-cap only portfolio. However, my Vanguard equities contain about 20% in Selected Value and 20% in Cap. Opp.

Keep in mind that although midcaps look pretty good now, they have gone on a nice run. I don't think they did as well in the 1990s. What will happen over the next 10 years is anyone's guess.
Perhaps you should review the links provided in Jerry's post that point to Trev's mid-cap return figures, Petro, since your recollection about mid-caps performance in the 1990s simply isn't supported by the facts. Mid-caps have, indeed, been on a nice run, but it's been a very long term nice run, as pointed out in Trev's figures for periods going back to 1927.

Here's a link to my original post on Mel's Unloved Mid-Caps on the M* forum in 2000, where, in a discussion with Larry Swedroe, I pointed out that a portfolio of nothing but mid-caps had outperformed a rebalanced (and much-ballyhooed) slice and dice portfolio: http://socialize.morningstar.com/NewSoc ... 27802.aspx


From Trev's post:
There is no combination of Large/Small rebalanced yearly that gets close to Mid Cap performance during this timeframe.

Using CRSP data back to 1927 a portfolio of 100% Mid Caps outperforms a 50/50 split between Large and Small (D1-2 & D6-8 ) rebalanced yearly in each of the previous 4 - 20 year periods and for the full span.
I'm certainly not recommending that everyone run out and change their portfolios. I've simply been pointing out since 2000 that mid-caps have been overlooked and snubbed by those who espouse the "barbell" (Large & Small cap) approach, and who state that mid-caps are "not needed". The return figures argue otherwise, so perhaps mid-caps should be given the respect they justly deserve.

Regards,

Mel

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Post by Easy Rhino » Sat Jan 12, 2008 1:05 pm

Well, that's comforting. The TSM part of me always seemed wary about simply leaving a size class out of a portfolio entirely. The other factoid that stuck out was that just a few years ago, I think the #1 performing asset class was midcap (maybe it was just one quarter, don't remember exactly). But it seemed counter intuitive enough that it really stuck out.

Do midcap indices typically have higher turnover than either large or small cap?

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Post by fundtalk » Sat Jan 12, 2008 1:41 pm

Here's some interesting numbers:

annualized returns 1927-2006 by CRSP decile (1 largest, 10 smallest)

1. 9.5%
2. 11.1%
3. 11.5%
4. 11.3%
5. 12.0%
6. 11.9%
7. 11.8%
8. 12.2%
9. 12.3%
10. 14.1%

My interpretation is that any strategy that limits exposure to megacaps has been beneficial. The return range between deciles 3-9 is relatively narrow (although, not insignificant when you compound over 80 years.)
You need to buy the very smallest stocks to get a significant return advatage (i.e. BRSIX).

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Post by Dead Man Walking » Sat Jan 12, 2008 2:05 pm

Fundtalk,

Thanks for bringing back this thread. It is a refreshing break from the threads about small, value, and REIT.

Jerry,

Thanks for the links to TrevH posts on cap performance. They will be beneficial to investors developing asset allocation plans.

Mel,

Thanks for the link to the original conversation. It provides perspective. I agree that mid-caps deserve more respect and should be considered when making an allocation to equities. There may be sound business reasons that explain the performance of this sector of the market.

DMW

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Post by NAVigator » Sat Jan 12, 2008 2:08 pm

I would recommend looking at both risk and reward and realize that the small-cap stocks have greater volatility along with the higher returns. That is why I emphasize the mid-caps in my portfolio to find the "sweet-spot" which gives higher returns without adding significant risk.

Kudos to Mel for his excellent posts about these excellent index funds and to TrevH for giving clear results of the data.

Jerry
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Post by Kenster1 » Sat Jan 12, 2008 4:38 pm

I am also a big fan of Midcaps -- and I've always thought of them as an easier and simpler way of doing Largecaps + Smallcaps.

Check out this related conversation:

http://www.diehards.org/forum/viewtopic ... ht=midcaps
Using data from 1996-2006 for some of the indexes

P1
25% TSM
50% Russell MidCap Value
25% CRSP10

P2
50% TSM
50% DFA Small Value

Code: Select all

1996-2006 

       Annualized    Standard 
         Return     Deviation    Sharpe 
P1       14.14        15.90      0.717      
P2       13.42        16.20      0.665   
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Post by Snoopy » Sat Jan 12, 2008 5:32 pm

Mel:

I've been thinking of adding some midcaps.

Do you weight to value or take more of a blend approach?


Thanks,

Snoopy

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Post by tc101 » Sat Jan 12, 2008 7:08 pm

I am over weight mid caps, but not exclusively mid cap. In taxable account I have total stock market and tax managed small cap. In IRA I have mid cap index. I am going to need to move the mid cap index to my taxable account to allow more room in my IRA for bond funds.

How does the mid cap index ETF do in a taxable account? Not as good as total stock market I am sure, but is it fairly tax efficient?

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Post by Kenster1 » Sat Jan 12, 2008 7:40 pm

The only long term data I know of is from the SSGA Midcap S&P400 SPDR ETF:

10 YR Returns per M*:

Pre-tax: 10.87%
After-tax: 10.32%

"We assume the highest tax rate in calculating these figures."
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Post by Mel Lindauer » Sat Jan 12, 2008 7:45 pm

Snoopy wrote:Mel:

I've been thinking of adding some midcaps.

Do you weight to value or take more of a blend approach?


Thanks,

Snoopy
Hi Snoopy:

Actually, in the shorter term, the MC Value, MC Blend and MC Growth seem to go their separate ways as far as annualized return goes. However, in the longer run (5 years), they've all produced close to the same returns (17.24%, 17.39% and 18.78%), with MCG the winner, MCB in second and MCV the lowest. However, that could all change in the next 5-10 years and value may well win out.

There's no sure-fire answer. You look at the data and the reasoning, see if it makes sense to you, and then make your own decision.

Regards,

Mel

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Post by Snoopy » Sat Jan 12, 2008 8:09 pm

Thanks, Mel.

Based on your data, it sure looks like one could have gone with MC Blend and captured most of the returns, since the three slices were fairly close.

If only we had a clear crystal ball to see the future! :wink:

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Post by White Coat Investor » Sat Jan 12, 2008 9:49 pm

Part of my small-tilt uses the mid-cap heavy extended market index S fund, so I guess I've got a bet on mid-caps too. I wasn't entirely comfortable with just TSM +micro, plus a good chunk of my savings is in the TSP.
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Post by PlainJane » Mon Jan 14, 2008 11:39 am

This is an interesting thread.

Has anyone looked at whether there is a midcap "sweetspot" for international as welll?

-Jane

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Re: Mel's unloved midcaps

Post by Sunny Sarkar » Mon Jan 14, 2008 12:00 pm

fundtalk wrote:I believe Mel has stated that his entire domestic portfolio is in midcaps. I don't seem to recall any other investors taking that position.
Mel, Is it true that you hold mostly midcaps as your domestic holdings? What are the equity funds in your portfolio - if you don't mind? Thanks.
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Post by Kenster1 » Mon Jan 14, 2008 12:26 pm

By the way, for anyone interested -- SSGA has just filed for an S&P International Midcap Index ETF.
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Re: Mel's unloved midcaps

Post by Mel Lindauer » Mon Jan 14, 2008 12:33 pm

Sunny wrote:
fundtalk wrote:I believe Mel has stated that his entire domestic portfolio is in midcaps. I don't seem to recall any other investors taking that position.
Mel, Is it true that you hold mostly midcaps as your domestic holdings? What are the equity funds in your portfolio - if you don't mind? Thanks.
Hi Sunny:

For a long time, I held nothing but mid-caps for my domestic equities. The funds I owned included Mid-Cap Index, Strategic Equity and, when it was introduced, Mid-Cap Value Index.

However, because of my age, I'm now working on simplifying my portfolio so that my wife, who's not interested in learning about investing at all, can handle things on autopilot should I predecease her. That means a move away from being entirely in mid-caps.

See you in San Diego.

Best regards,

Mel

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Re: Mel's unloved midcaps

Post by BlueEars » Mon Jan 14, 2008 6:26 pm

Mel Lindauer wrote: However, because of my age, I'm now working on simplifying my portfolio so that my wife, who's not interested in learning about investing at all, can handle things on autopilot should I predecease her. That means a move away from being entirely in mid-caps.
Mel, I've been trying to plan this one out also. Why not just continue with your investments and then ask your wife to contact Vanguard to set up a diversified portfolio should you predease her? All she would need would be her asset allocation and perhaps some index fund suggestions and percentages from you. I would think Vanguard would then do the rest.

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Re: Mel's unloved midcaps

Post by Mel Lindauer » Mon Jan 14, 2008 7:01 pm

Les wrote:
Mel Lindauer wrote: However, because of my age, I'm now working on simplifying my portfolio so that my wife, who's not interested in learning about investing at all, can handle things on autopilot should I predecease her. That means a move away from being entirely in mid-caps.
Mel, I've been trying to plan this one out also. Why not just continue with your investments and then ask your wife to contact Vanguard to set up a diversified portfolio should you predease her? All she would need would be her asset allocation and perhaps some index fund suggestions and percentages from you. I would think Vanguard would then do the rest.
Hi Les:

I've already talked to her about Vanguard helping out, and she doesn't want them involved. Besides, she'd still need to understand what they're talking about, and she wants no part of that. In fact, whenever I try to discuss this with her, she simply tells me that I'm not allowed to die first, and that's that! Fortunately, I have good genes (Dad's 93 and Mom's 90 and both are still ticking.)

As a backup, though, I've told her to contact Rick Ferri if she feels she can't handle things the way I leave them.

Finally, I'm becomming a big fan of simplicity.

Regards,

Mel

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VG returns

Post by diasurfer » Mon Jan 14, 2008 7:06 pm

I found the following interesting.

VG MidCap Index Fund, VG SmallCap Growth Index Fund, and VG Small Cap Value Index Fund all have inception date of 5/21/98.

Average Annual Total
Returns as of 12/31/2007

SCVI 8.25%
SCGI 8.27%
MCI 11.23%

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Post by BlueEars » Mon Jan 14, 2008 7:34 pm

Mel, why are some spouses this way? And all your wife has to do is read your book :D.

I thought maybe I was the only one who had this problem. I'll have to rethink my approach as I'm not sure my wife would want to pick up the phone and think about investments even if I leave some detailed notes. Oh well, we analyticals have to have something to ponder.

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Post by Mel Lindauer » Mon Jan 14, 2008 7:42 pm

Les wrote:Mel, why are some spouses this way? And all your wife has to do is read your book :D.

I thought maybe I was the only one who had this problem. I'll have to rethink my approach as I'm not sure my wife would want to pick up the phone and think about investments even if I leave some detailed notes. Oh well, we analyticals have to have something to ponder.
Actually, Les, we used my wife as a Guinea pig when we were writing the book. We wanted to make sure that we were writing at a level where even someone who didn't know anything about investing could understand what we were saying, and not have their eyes glaze over. Once my wife said she understood some early copy, we knew we were on the right track!

However, she hasn't read another word since then!

Regards,

Mel

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Re: Mel's unloved midcaps

Post by jeffyscott » Tue Jan 15, 2008 9:28 am

Les wrote:Why not just continue with your investments and then ask your wife to contact Vanguard to set up a diversified portfolio should you predease her? All she would need would be her asset allocation and perhaps some index fund suggestions and percentages from you. I would think Vanguard would then do the rest.

My written instructions now give my wife an option to put everything in each account in one or two balanced funds. This way is what was most appealing to her, when I described what she would need to do under various alternatives. I still include more complicated options, in case she would change her mind about her opposition to "fiddling" (rebalancing).

If Vanguard would offer automatic rebalancing, I think she would go for rolling everything there (after age 59.5), setting up allocations that I could give her and letting them do the rebalancing. This gives me a thought...my 457 plan does have automatic rebalancing available, so I could set up something a little more complicated in that account. I had not thought of that previously.
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Post by dlpmpls » Sat Jan 19, 2008 7:49 pm

In 02/05/2002 William Bernstein was quoted as saying You only use a mid-cap index fund if you're an asset-class junkie

Well suppose you don't have a total US stock market fund in your 401K does that still make you an asset junkie if you have to use large, mid-cap and small index funds to replicate the total US stock market? It just strikes me odd that he make such a statement, If markets are efficient I would think including what is in the efficient markets wouldn't make you an asset junkie.

Dan
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Post by Mel Lindauer » Sat Jan 19, 2008 8:01 pm

dlpmpls wrote:In 02/05/2002 William Bernstein was quoted as saying You only use a mid-cap index fund if you're an asset-class junkie

Well suppose you don't have a total US stock market fund in your 401K does that still make you an asset junkie if you have to use large, mid-cap and small index funds to replicate the total US stock market? It just strikes me odd that he make such a statement, If markets are efficient I would think including what is in the efficient markets wouldn't make you an asset junkie.

Dan
Hi Dan:

Not sure if he holds any mid-caps or not, but Bill does admit to being an "asset junkie" himself, so that's not a derogatory statement!

Regards,

Mel

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Post by Munir » Sat Jan 19, 2008 11:19 pm

I have the same wife issue you referred to above. I'm waiting for the Managed Payout Funds to become available and see if I can roll over all my holdings into one of them and maybe the Retirement Income Fund. Can you share where your intial thoughts regarding simplification are headed?

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Re: Mel

Post by Mel Lindauer » Sat Jan 19, 2008 11:58 pm

Munir wrote:I have the same wife issue you referred to above. I'm waiting for the Managed Payout Funds to become available and see if I can roll over all my holdings into one of them and maybe the Retirement Income Fund. Can you share where your intial thoughts regarding simplification are headed?
Hi Munir:

Your thinking about the Target Retirement Income Fund meshes with my thinking for both diversification and simplification. I don't have a good handle on how the Managed Payout Funds are going to work yet, so I'll pass on those for now.

Best regards,

Mel

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Post by dlpmpls » Sun Jan 20, 2008 2:09 am

Mel Lindauer wrote:Hi Dan:

Not sure if he holds any mid-caps or not, but Bill does admit to being an "asset junkie" himself, so that's not a derogatory statement!

Regards,

Mel
No problem Mel, I didn't take as a derogatory statement. It just surprised me that Bernstein would make such a statement. I guess I need to read one of his books to see why.

Dan
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Post by jeffyscott » Sun Jan 20, 2008 6:59 am

In checking into automatic rebalanancing, I have found that T. Rowe Price, unlike Vanguard, does offer automatic rebalancing for IRA accounts. My wife's 403b is there, but they don't offer rebalancing for that.

I'll have to think about instructing her to roll everything to T. Rowe Price and using the automatic rebalancing.
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Post by Kenster1 » Sun Jan 20, 2008 7:30 am

jeffyscott wrote:In checking into automatic rebalanancing, I have found that T. Rowe Price, unlike Vanguard, does offer automatic rebalancing for IRA accounts. My wife's 403b is there, but they don't offer rebalancing for that.

I'll have to think about instructing her to roll everything to T. Rowe Price and using the automatic rebalancing.
This is what you're referring to...
You’ve put a lot of time and hard work into building your IRA retirement portfolio and creating just the right asset allocation strategy. But no matter how carefully you plan, market volatility can drastically change your portfolio’s investment mix.

To help keep your portfolio on track, T. Rowe Price now offers a free rebalancing service for accounts of $10,000 or more. It’s easy to use … just tell us your preferred allocation of T. Rowe Price funds (for example, 50% Growth Stock Fund, 30% Spectrum Income Fund, 20% Prime Reserve Fund), and we’ll automatically rebalance your account each quarter. Once you make your initial choice, you save time and make sure your portfolio is properly positioned to meet your goals.

Rebalancing assures that your portfolio will begin each new quarter with the asset allocation you've selected to meet your risk tolerance. If you don’t rebalance, rapid price swings can dramatically impact your portfolio over time. For example, a sharp rise in stocks could significantly increase the equity portion of your portfolio at the expense of more conservative options such as bonds and money market securities. As a result, you could be exposed to more investment risk than you originally intended.

In addition, rebalancing shifts money from an asset class that has performed well to one that has lagged. This may allow you to take advantage of relatively low prices in the underperforming asset class.

Please note that rebalancing is not a market timing strategy since it does not depend on anticipating moves in the market. Instead, it’s a systematic approach that helps you deal consistently with changes in the market over the long term.
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Post by Mel Lindauer » Sun Jan 20, 2008 10:18 am

jeffyscott wrote:In checking into automatic rebalanancing, I have found that T. Rowe Price, unlike Vanguard, does offer automatic rebalancing for IRA accounts. My wife's 403b is there, but they don't offer rebalancing for that.

I'll have to think about instructing her to roll everything to T. Rowe Price and using the automatic rebalancing.
Hi jeffy:

Vanguard, does, in fact, do "automatic rehalancing" in their Target Retirement funds.

Regards,

Mel
Last edited by Mel Lindauer on Sun Jan 20, 2008 11:22 am, edited 1 time in total.

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Post by woof755 » Sun Jan 20, 2008 10:55 am

This question has popped up a couple times in this thread:

Would mid-cap index (or other mid-cap funds: growth, blend, value) be suitable for taxable accounts, as is total market index?

My gut feeling is no, but I'm not certain. Guess I'll head to M* and take a look at tax efficiency.
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broadly diversified index--TSM

Post by looking » Sun Jan 20, 2008 10:57 am

hi mel and other diehard

I am a bit confused about MID Cap blend

We all know that the broadly diversified index--ToTal Stock market index- that is core fund from there-may be adding small cap or health care or Reit so on. Isnt that the total stock market included midcap and i want to know what percantage of midcap in it

Now it tells MId Cap blend is the way to go ????
I know i am missing some thing . I am learning everyday but i need more education and to clearify. so combination of midcap and 500 index is a good mixture than ToTal market

i know Dan's portfolio is most MId Cap for core fund.

best wishes

tom

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Post by jeffyscott » Sun Jan 20, 2008 11:17 am

Mel Lindauer wrote: Vanguard, does, in fact, do "automatic rehalancing" in their Target Retirement funds.
Yes, as long as one is happy with market weightings. I prefer more value and small cap. Wellington and Wellesley also automatically rebalance. In current instructions, I do have suggestions such as a 50/50 mix of Wellington and Retirement income, that gets a little value and also get some TIPS.

Like some others, I am also waiting to see what the Vanguard payout funds look like. I read that T. Rowe is to come out with some payout funds, as well.
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Post by Kenster1 » Sun Jan 20, 2008 11:53 am

woof755 wrote:This question has popped up a couple times in this thread:

Would mid-cap index (or other mid-cap funds: growth, blend, value) be suitable for taxable accounts, as is total market index?

My gut feeling is no, but I'm not certain. Guess I'll head to M* and take a look at tax efficiency.
The only long-term data I know of for a Midcap index product is the popular one from SSGA -- SPDR Midcap (S&P400) ETF.

10-YR Data based on the highest tax bracket:

Pre-tax: 10.82%
After-tax: 10.26%


Personally, I don't think there's an absolutely right or wrong answer to putting midcaps in taxable account -- it depends on how much tax efficiency you're striving for and what else you're doing in your portfolio.

People from the Midwest find North Carolina pleasant during a winter visit but those from Florida find it a bit too chilly. So is NC pleasantly mild or cold during the winter? Depends who you ask and their frame of reference.
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Post by woof755 » Sun Jan 20, 2008 12:01 pm

woof755 wrote:This question has popped up a couple times in this thread:

Would mid-cap index (or other mid-cap funds: growth, blend, value) be suitable for taxable accounts, as is total market index?

My gut feeling is no, but I'm not certain. Guess I'll head to M* and take a look at tax efficiency.
Ultimate faux-pas, quoting onesself--anyways, actually mid-cap index (VIMSX) looks very tax-efficient.
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Post by Mel Lindauer » Sun Jan 20, 2008 12:39 pm

woof755 wrote:
woof755 wrote:This question has popped up a couple times in this thread:

Would mid-cap index (or other mid-cap funds: growth, blend, value) be suitable for taxable accounts, as is total market index?

My gut feeling is no, but I'm not certain. Guess I'll head to M* and take a look at tax efficiency.
Ultimate faux-pas, quoting onesself--anyways, actually mid-cap index (VIMSX) looks very tax-efficient.
Keep in mind that, with the somewhat recent change in the Mid-Cap Index fund's bogey, the expansion bands should make the fund a bit more tax efficient than the longer-term record might indicate.

Regards,

Mel

squawk
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Midcap Value vs. Growth

Post by squawk » Sun Mar 21, 2010 11:59 am

Any update on whether blend or value is preferred for midcaps?

In the long run (since 1927) it appears that value has been the undisputed leader.

However, the category is extremely vulnerable to financial crises (1990, 2008). Since most value funds hold 25%+ in the financial sector, this worries me.

I am leaning toward holding just Mid Cap Blend in case the value premium is diminished over the coming years and to get sector diversification.

Thoughts?

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tinscale
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Post by tinscale » Mon Apr 05, 2010 8:51 am

FYI:

On the seekingalpha website, Richard Shaw, managing principal of QVM Group LLC, discusses why he favors mid-caps.

Posted 4/4/2010
http://seekingalpha.com/article/196892- ... u-s-market

Posted 4/5/2010
http://seekingalpha.com/article/197004- ... sweet-spot

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