Author Topic: VTSAX not diversified enough?  (Read 718 times)

cincystache

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VTSAX not diversified enough?
« on: September 14, 2020, 06:21:49 PM »
Forgive me if this has been asked before but I couldn't readily find a similar thread...

I have almost all of my US stock exposure in the form of VTSAX (or the equivalents SCHB, VTI, FSKAX) based on simplicity/JL collins book etc.

With the recent surge in tech stocks I now see that the top 7 tech stocks (AAPL, MSFT, AMZN, FB, GOOG, NVDA, TSLA) comprise over 22% of the portfolio. While I'm thankful for the boost in performance, I'm starting to feel a little concentrated in one sector/size company. I thought the whole philosophy of VTSAX is not being concentrated in too few companies. 

Does anyone branch out and divide their US allocation evenly into Large, Mid, Small cap funds to get a more even distribution? How about splitting further into growth and value funds as well as market cap so having 4-6 funds with equal amounts instead of 1 fund? I used to argue that the complexity and/or added cost wasn't worth it but when I think about it, it only takes 5 minutes per year to rebalance everything back to even and the expense ratio differences between these funds is almost zero.

Does this concern anyone else or am I overthinking things and I should keep plowing into VTSAX?

jamesbond007

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Re: VTSAX not diversified enough?
« Reply #1 on: September 14, 2020, 06:29:40 PM »
VTSAX is a market cap weighted fund. So naturally, as of now, those stocks take up much of the share. I am sure back when XOM had the highest market, it would have been in AAPL's position today. It has 3500 stocks in its portfolio, so it is the entire market. In my view, it can't get any more diversified that it. I believe the only thing missing from VTSAX are Bonds and Real Estate and of course international stocks. Look at the other side, if those 6 stocks tank, then there is a much bigger problem :)

Radagast

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Re: VTSAX not diversified enough?
« Reply #2 on: September 14, 2020, 09:35:21 PM »
I looked into this here:
https://forum.mrmoneymustache.com/investor-alley/portfolio-design-idiots-v-gurus/

Generally, I support your suspicion that at least a three fund portfolio is needed, and I like four or more, at the very least one of the Vanguard balanced funds which contain four funds but are as easy to manage as one fund . My perpetual advice is:
At least 50% stocks
Not more than 50% US or other single country/currency stocks
10-40% bonds/cash
Include international stocks at ~20-50% of stock holdings
A real asset, possibly a house, or several is nice, especially coming up on ER. But don't forget business is the main driver of long term returns and the main protection against long term downside risk. As long as people are prospering, and they probably will be, you want a big part of that.

joleran

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Re: VTSAX not diversified enough?
« Reply #3 on: September 15, 2020, 04:44:36 PM »
I have had a major small cap tilt for many years due to these concerns, not much of a value tilt though.  I weight small cap and mid cap each at roughly 80% of large cap.  (as a somewhat interesting aside - somehow personal capital thinks I am very overweight mid cap growth compared to mid cap value despite not owning any growth-specific funds)

This of course has not done well for me in the last 5 years or so, but changing now would be performance chasing.  If you are considering doing a tilt, this is probably a relatively great time to do so if it ever does turn out to pay off.

Telecaster

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Re: VTSAX not diversified enough?
« Reply #4 on: September 15, 2020, 05:20:38 PM »
Does anyone branch out and divide their US allocation evenly into Large, Mid, Small cap funds to get a more even distribution? How about splitting further into growth and value funds as well as market cap so having 4-6 funds with equal amounts instead of 1 fund? I used to argue that the complexity and/or added cost wasn't worth it but when I think about it, it only takes 5 minutes per year to rebalance everything back to even and the expense ratio differences between these funds is almost zero.

Does this concern anyone else or am I overthinking things and I should keep plowing into VTSAX?

That's reasonably close to the way I do it.  There is some good evidence that equal weight beats cap-weight over sufficiently long periods of time.  There are a few ways to look at it, but be warned it is rabbit hole once you start.  That said, an 60/40 blend of VOO/VO gives you essentially an equal weighted S&P 500 index fund.  Or you could just buy RSP, which is S&P equal weight ETF (but at a slightly higher expense ratio).   QQQE is Nasdaq equal weight, if you'd like to consider that.  Then buy a jigger of small cap if you like (maybe 10% of the total) and another jigger of international and you are pretty well diversified. 

Warning! If you had followed this strategy over the last few years you would be lagging VTSAX.  So consider that.




Buffaloski Boris

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Re: VTSAX not diversified enough?
« Reply #5 on: September 15, 2020, 06:27:11 PM »
Short answer: in my opinion yes. Putting 20% plus of a portfolio into 6 or 7 stocks is a bad idea in my view. Take it one step further and look at what the top 50 or so stocks in VTSAX comprise. There are equal weight alternatives such as RSP.  And lots of international alternatives.

cincystache

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Re: VTSAX not diversified enough?
« Reply #6 on: September 15, 2020, 08:01:28 PM »
thanks for the great replies thus far. I have some more reading to do but I'm leaning towards making some changes to my strategy with the intent to revise my IPS and stick to this for the long term regardless of market changes...

I currently have about 48%VTSAX 32% VTIAX and 20% VBTLX.

New allocation would look something like...

8 VTI (total stock market)
8 VTV (Large cap value)
8 VO (Mid cap)
8 VOE (Mid Cap value)
8 VB (Small cap)
8 VBR (Small cap value)
24 VXUS (total int'l stock)
8 VWO (emerging markets)
20 VBTLX (total bond market)

I feel pretty good about that. Evenly spread between small mid large, tilted towards value, easy to rebalance.

Opinions value tilt or would you just stick with 16/16/16 small/mid/large blend funds?