Author Topic: Approximating the Market  (Read 1813 times)

Bruised_Pepper

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Approximating the Market
« on: November 06, 2013, 04:44:18 PM »
I'm about to start contributing to the 403b plan at my new job, but my plan doesn't offer the Vanguard Total Stock Market Index Fund.  It offers the Vanguard Institutional Index for the S&P 500 and the Vanguard Extended Market Index for mid- and small-cap firms.  After reading about "approximating the market" on the Bogleheads Wiki, I looked up the Morningstar style map for both funds and compared it to the Total Stock Market Index Fund.  So, I have two grids of 9 numbers (one for each of the funds I can buy).  Is approximating the Total Stock Market Index as easy as assigning each fund a weight and using a weighted average of the two funds to come as close as possible to the Total Stock Market Index?  If so, then I quickly calculated that an 80/20 allocation works pretty well:

(28*.8)+(1*.2) = 24 (30*.8)+(1*.2) = 24 (29*.8)+(4*.2) = 24
(4*.8)+(14*.2) = 6 (5*.8)+(13*.2) = 7 (3*.8)+(21*.2) = 7
(15*.2) = 3 (16*.2) = 3 (15*.2) = 3

Rounded, of course.  Is this right?