Costs Matter. AA Matters. Which is more important?

[forestj]

I consider myself lucky to find myself in a a 401k plan that offers index funds at all.

So far I have started out with 60% US stock, primarily in  FXSIX  (a 500 index) with a  0.035% ER.
I also have about 30% international stock, primarily in  FSGDX (like MSCI AC world ex us) with a 0.11% ER
The rest is thrown in a vanguard target date fund.

Looking at my AA, I think I might like to get some stock in smaller companies, since I primarily have large companies in the index funds I own.  But the only options I have for "small cap" funds have much higher ERs like 0.7%.

Is it worth it to diversify that way if it costs 0.7% a year?  Maybe I will consider opening a Vanguard brokerage account and buying some small cap indexes there? NAESX/VSMAX (Vanguard small cap index with 0.2% ER or 0.08% for "admiral"s)

Am I thinking about this all wrong? So far my investment goals have been:
  - Don't invest that much in bonds
  - Try to buy just about every kind of stock using low cost indexes

I don't really know what my tolerance for "risk" is (really though, I'm talking about tolerance for watching account balance go down at the beginning of a recession/depression)  since I have never had that experience.  I would like to think that I would be able to "Toughen up, cupcake!" and keep on investing through it.

[forummm]

I would just stick with the super cheap 500 index fund for US. You can put some of your IRA/taxable savings in Vanguard's VEXAX fund (the US market excluding the 500 index fund firms) to approximate the total US market. I think the ratio is 80% 500 and 20% VEXAX to equal VTSAX. Your international fund is cheap enough that I think it's good to have.

[ender]

Do you only have this for investments?

At this point I've got enough in non-401k retirement (IRAs and previous-401ks rolled into an IRA) that I would need insane company match to make it such that I couldn't manipulate the IRAs into matching our desired AA.

And I do this, the only semi-decent fund in our 401k is a ~0.50% ER SP500 index fund. So my 401k is 100% that.

[MustacheAndaHalf]

Small cap may or may not perform better than large cap going forward.  I'd suggest giving up on a 0.70% expense and going with as much of a 3-fund portfolio as you can assemble.

You mentioned US stocks and international stocks.  But very relevant to the thread title, where are your bonds?  You don't really have an asset allocation when it's 100% stocks.  And to the general question "AA or low fees", I'd actually say it depends on how close you are to retirement.

Early on, if you avoid bonds, you're probably okay.  It's not good behavior, but if you know it needs to change later it can work.  But late in your investing, if you lack bonds your portfolio could crash along with your dreams of retirement.  So as you approach retirement, I'd say an expensive bond fund might be more important than a distorted asset allocation of 0% bonds.