Author Topic: Diversification in Multiple indexes bad for compounding?  (Read 1975 times)

Jamese20

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Diversification in Multiple indexes bad for compounding?
« on: June 01, 2017, 01:19:44 PM »
hi guys,

My child is keeping me up late at night most nights so my brain probably isn't working very well today,

am i missing something? by picking 4 different index funds to diversify aren't you hindering your compound effect on returns massively? if you pick one index fund that does the diversification you want and invest all your money into that the compounding effect is surely huge compared to picking 4 different ones?

I am sure this is the case as i ran a couple of compound calculations and the difference over a decade is huge

this makes a massive case for all in one funds?

MDM

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Re: Diversification in Multiple indexes bad for compounding?
« Reply #1 on: June 01, 2017, 03:53:09 PM »
A*(1+i)^n + B*(1+i)^n + C*(1+i)^N = (A+B+C)*(1+i)^n

In other words, if the returns are the same it doesn't matter how many different funds you have: the results are identical.

solon

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Re: Diversification in Multiple indexes bad for compounding?
« Reply #2 on: June 01, 2017, 03:57:20 PM »
A*(1+i)^n + B*(1+i)^n + C*(1+i)^N = (A+B+C)*(1+i)^n

In other words, if the returns are the same it doesn't matter how many different funds you have: the results are identical.

Yeah, I was going to say that. I was just waiting for someone to say it better. :)

Also, diversification into multiple index funds might not be true diversification. Look carefully at what each fund is investing in. You might be over/under allocated in some areas.

MustacheAndaHalf

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Re: Diversification in Multiple indexes bad for compounding?
« Reply #3 on: June 02, 2017, 07:02:27 AM »
"by picking 4 different index funds to diversify"

Some diversification is "don't be left behind", like holding both a US index fund and an international index fund.  Other diversification aims at cushioning against stock market corrections, like a US bond fund.

Something else to think about: some indexes can be bought as one fund, or several.  For example, Vanguard Total Stock Market captures the entire US stock market.  But you can also buy 3 funds separately: a large cap, mid cap and small cap index fund.  You wind up with the same assets in both cases, although with 3 funds you might not hold the same weightings as the market.

An all in one fund should perform no differently than holding it's underlying funds, except for the management fee difference.  It might help if you list the 4 funds you are considering, so it becomes a less abstract discussion.

Louisville

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Re: Diversification in Multiple indexes bad for compounding?
« Reply #4 on: June 02, 2017, 08:25:05 AM »
For example, Vanguard Total Stock Market captures the entire US stock market.  But you can also buy 3 funds separately: a large cap, mid cap and small cap index fund.  You wind up with the same assets in both cases, although with 3 funds you might not hold the same weightings as the market.

Is it not true, however, that by holding the three different funds one gains when rebalancing? Assuming there is some difference in how they move.