guyesmith wrote: ↑
Fri May 18, 2018 9:05 am
MotoTrojan wrote: ↑
Fri May 11, 2018 3:32 pm
Skip the mid-cap, go with Total US and Small-cap (Vanguards small-cap is actually 50/50 mid/small) and consider using the small-value fund which performed even better in back-testing.
Still a 3-fund portfolio with Total International, and higher EXPECTED returns.
50/25/25 would be a nice balance.
Thanks! I like this idea A LOT. You're right about the mid/small when I punch it into Portfolio Visualizer I find there are a lot of mid caps in the small funds. I'm considering but hesitant to do value as well. Seems it takes a LONG time for value to win, though it wins big over a 40 year time frame it seems.
I've avoided bonds so its a 2-fund portfolio. Also may scratch international so its a 1-fund portfolio with a tilt to small (maybe small value).
It is not really accurate to say that "it takes a LONG time for value to win".
It would be more accurate to say that sometimes growth stocks outperform value stocks for a long time, and sometimes value stocks outperform growth stocks for a long time. You could say the same thing about small stocks versus large stocks and U.S. stocks versus foreign stocks. Or even about bonds versus stocks.
The length of time it takes for one to 'win' depends entirely on which will be in favor soon, which is impossible to know. That's why a smart portfolio includes a mix of different asset classes, factor exposures, etc.
We have lots of evidence that stocks have USUALLY outperformed bonds, that small stocks have USUALLY outperformed large ones, value stocks have USUALLY outperformed growth stocks, and that foreign stocks perform about as well as U.S. stocks.
In fact, the effect of these factors is so strong that since 1972 a portfolio that was 50% bonds and 50% value/small-tilted equities outperformed a portfolio that was 80% "total stock market" and 20% bonds.
Of course no guarantee the next 48 years will look like the last 48 (and I am definitely NOT recommending a portfolio like the ones on the attached image), but I think the evidence is strong that a well-diversified portfolio that includes large stocks, small value stocks, international stocks, and a few bonds is the smartest investment.
If you don't think you need bonds in your portfolio at this stage of your life, I won't try to talk you into it.
But an equity portfolio that doesn't include 20% to 30% international stocks isn't likely to be as successful as one that does.
I think a three fund equity portfolio finds its sweet spot somewhere near here:
- 50% VTSMX Total Stock Market Index Fund
25% VISVX Small-Cap Value Index Fund
25% VGTSX Vanguard Total Intl Stock Index
Such a portfolio would be well-diversified across countries and, while still primarily consisting of large cap stocks would include some small caps in reasonable amounts.