Author Topic: Large Cap vs Mid Cap Indexing  (Read 5148 times)

Texan

  • 5 O'Clock Shadow
  • *
  • Posts: 32
Large Cap vs Mid Cap Indexing
« on: July 23, 2014, 04:55:47 AM »
I am choosing between investing in mid cap vs. a large cap index fund through vanguard. I will have about 3000 upfront and will continue to invest more. So I cannot afford the $10,000 minimum funds.

As of now, one of my goals, which could change, is to invest for about 10-15 years and take my money out and purchase some real estate. For this reason the mid cap funds seem better. They have about a 10% return over 10 years where as the large cap have around 7-9%. Which is still great. But I read a lot here and other places, and usually the large cap funds are recommended.

Thanks !

gecko10x

  • Bristles
  • ***
  • Posts: 420
    • SawyerPF
Re: Large Cap vs Mid Cap Indexing
« Reply #1 on: July 23, 2014, 05:21:45 AM »
Mid-cap funds typically return more because they are higher risk. If your investment timeframe is shorter, most people would recommend less risk, not more.

Texan

  • 5 O'Clock Shadow
  • *
  • Posts: 32
Re: Large Cap vs Mid Cap Indexing
« Reply #2 on: July 23, 2014, 07:29:00 AM »
Mid-cap funds typically return more because they are higher risk. If your investment timeframe is shorter, most people would recommend less risk, not more.

Ok thanks. I also have some funds in VDE , a higher risk etf. Should I reconsider this etf and instead get lower risk etfs? The time frame is the same , around 10-15 years.

Grateful Stache

  • Stubble
  • **
  • Posts: 196
Re: Large Cap vs Mid Cap Indexing
« Reply #3 on: July 23, 2014, 07:40:13 AM »
For this reason the mid cap funds seem better. They have about a 10% return over 10 years where as the large cap have around 7-9%. Which is still great.

It's important to understand why these funds have different rates of returns as opposed to looking directly at their return percentages. Clearly, if one fund returns 10% and another returns 7%, everyone would go with the 10%, right? [all other things being equal, of course]. As Gecko pointed out, mid-cap funds are typically more volatile, hence the greater return (for greater risk).

The short answer to your question is yes, with a 10-15 year investment window, you should be OK with only mid-cap funds. Along the way, you should expect some serious bumps and bruises, but after 10 years, you will almost certainly have more than you started with.

However, I really encourage you to understand where you are putting your money. Check out the Dummies series by Russell Wild (ETFs for Dummies, Investing for Dummies - Seriously, they are great!). Other good authors are Ferri, Bernstein and Malkiel.

Cheers and good luck!


foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Large Cap vs Mid Cap Indexing
« Reply #4 on: July 23, 2014, 03:17:24 PM »
I am choosing between investing in mid cap vs. a large cap index fund through vanguard. I will have about 3000 upfront and will continue to invest more. So I cannot afford the $10,000 minimum funds.

As of now, one of my goals, which could change, is to invest for about 10-15 years and take my money out and purchase some real estate. For this reason the mid cap funds seem better. They have about a 10% return over 10 years where as the large cap have around 7-9%. Which is still great. But I read a lot here and other places, and usually the large cap funds are recommended.

Thanks !

Your better off buying the fund with the lower 10-15 year returns.:) Seriously compare mid caps to large caps for the 1984-1999 period (large caps out performed by a bit over 2%). When you look at short periods of time like 10-15 years you are just looking at what sector has been hot lately. Over long periods of time (30+ years) mid caps should outperform large caps. But buying a sector after it has had a hot 15 years is rarely a great investing move.


That being said I have liked midcaps since I started investing.  They seem like a nice split between small and large and I sort of like the fact that I recognize most of the companies. In the small companies indexes, I have never heard of most of them. At the end of the day, the choice isn't likely to matter. Once of them is going to earn 1-2% more than the other but guessing which one is 75/25 at best.

Texan

  • 5 O'Clock Shadow
  • *
  • Posts: 32
Re: Large Cap vs Mid Cap Indexing
« Reply #5 on: July 23, 2014, 03:59:33 PM »
I am choosing between investing in mid cap vs. a large cap index fund through vanguard. I will have about 3000 upfront and will continue to invest more. So I cannot afford the $10,000 minimum funds.

As of now, one of my goals, which could change, is to invest for about 10-15 years and take my money out and purchase some real estate. For this reason the mid cap funds seem better. They have about a 10% return over 10 years where as the large cap have around 7-9%. Which is still great. But I read a lot here and other places, and usually the large cap funds are recommended.

Thanks !

Your better off buying the fund with the lower 10-15 year returns.:) Seriously compare mid caps to large caps for the 1984-1999 period (large caps out performed by a bit over 2%). When you look at short periods of time like 10-15 years you are just looking at what sector has been hot lately. Over long periods of time (30+ years) mid caps should outperform large caps. But buying a sector after it has had a hot 15 years is rarely a great investing move.


That being said I have liked midcaps since I started investing.  They seem like a nice split between small and large and I sort of like the fact that I recognize most of the companies. In the small companies indexes, I have never heard of most of them. At the end of the day, the choice isn't likely to matter. Once of them is going to earn 1-2% more than the other but guessing which one is 75/25 at best.

Thanks guys! So does the Sector ETF not make much sense? I mean, should I expect much more return in that ETF vs. VTSAX? In 10-15 years VTSAX usually has great returns and they are almost guaranteed. Is it safe to assume that the sector ETF is just more risk for a chance of perhaps maybe 1-2% more than VTSAX? Or does VDE have a chance to blow VTSAX out of the water?

Thanks

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Large Cap vs Mid Cap Indexing
« Reply #6 on: July 23, 2014, 04:24:02 PM »
I am choosing between investing in mid cap vs. a large cap index fund through vanguard. I will have about 3000 upfront and will continue to invest more. So I cannot afford the $10,000 minimum funds.

As of now, one of my goals, which could change, is to invest for about 10-15 years and take my money out and purchase some real estate. For this reason the mid cap funds seem better. They have about a 10% return over 10 years where as the large cap have around 7-9%. Which is still great. But I read a lot here and other places, and usually the large cap funds are recommended.

Thanks !

Your better off buying the fund with the lower 10-15 year returns.:) Seriously compare mid caps to large caps for the 1984-1999 period (large caps out performed by a bit over 2%). When you look at short periods of time like 10-15 years you are just looking at what sector has been hot lately. Over long periods of time (30+ years) mid caps should outperform large caps. But buying a sector after it has had a hot 15 years is rarely a great investing move.


That being said I have liked midcaps since I started investing.  They seem like a nice split between small and large and I sort of like the fact that I recognize most of the companies. In the small companies indexes, I have never heard of most of them. At the end of the day, the choice isn't likely to matter. Once of them is going to earn 1-2% more than the other but guessing which one is 75/25 at best.

Thanks guys! So does the Sector ETF not make much sense? I mean, should I expect much more return in that ETF vs. VTSAX? In 10-15 years VTSAX usually has great returns and they are almost guaranteed. Is it safe to assume that the sector ETF is just more risk for a chance of perhaps maybe 1-2% more than VTSAX? Or does VDE have a chance to blow VTSAX out of the water?

Thanks

Over 10 years there are no guarantees that VTSAX will have positive returns.  Sector investing is a crap shoot. If one sector always outperformed the others, everyone would invest in that. In the real world some sectors do good for 5-10 years and then they struggle and another sector tackes over. For fun look at http://www.sectorspdr.com/sectorspdr/tools/sector-tracker and notice how over the past 5 years(i.e. a real short period of time) the best sector was up 175% while the worst was up 50%. Thats a pretty big difference.  You sector might blow VTSAX out of the water but the odds are the same for VTSAX blowing VDE out of the water.

ect

  • 5 O'Clock Shadow
  • *
  • Posts: 29
Re: Large Cap vs Mid Cap Indexing
« Reply #7 on: July 23, 2014, 05:45:20 PM »
In 10-15 years VTSAX usually has great returns and they are almost guaranteed.
Over 10 years there are no guarantees that VTSAX will have positive returns.

Sorry if I'm nitpicking, but the comment from the OP caught my eye as well. On Yahoo Finance, the earliest data for VTSAX is from November 2000. For the 10-year period immediately forward, the fund was nearly unchanged in price, increasing from about 29 to 30, ignoring dividends, which were low by historical standards.

And if you look back into more distant history, you can find other periods of long-term stock market unpleasantness. As usually defined, a "secular bear market" can last 20 years or so.

I think all your options under consideration are reasonable, just be aware that if your timing is particularly unlucky, you won't be happy with the results.

Good luck :)

Texan

  • 5 O'Clock Shadow
  • *
  • Posts: 32
Re: Large Cap vs Mid Cap Indexing
« Reply #8 on: July 23, 2014, 06:46:41 PM »
In 10-15 years VTSAX usually has great returns and they are almost guaranteed.
Over 10 years there are no guarantees that VTSAX will have positive returns.

Sorry if I'm nitpicking, but the comment from the OP caught my eye as well. On Yahoo Finance, the earliest data for VTSAX is from November 2000. For the 10-year period immediately forward, the fund was nearly unchanged in price, increasing from about 29 to 30, ignoring dividends, which were low by historical standards.

And if you look back into more distant history, you can find other periods of long-term stock market unpleasantness. As usually defined, a "secular bear market" can last 20 years or so.

I think all your options under consideration are reasonable, just be aware that if your timing is particularly unlucky, you won't be happy with the results.

Good luck :)

Thanks! I am trying to understand what you mean. Bottom line though, i am assuming, is that investing a large portion of my income in VTSAX is never a bad idea. Is that a safe and financially wise decision?


ect

  • 5 O'Clock Shadow
  • *
  • Posts: 29
Re: Large Cap vs Mid Cap Indexing
« Reply #9 on: July 23, 2014, 07:37:31 PM »
Thanks! I am trying to understand what you mean. Bottom line though, i am assuming, is that investing a large portion of my income in VTSAX is never a bad idea. Is that a safe and financially wise decision?

I guess I would have to describe it as wise but not safe. Being new here, I'm afraid to link to an external site, but someone charted a century of rolling 10-year returns (including dividends) for the Dow. The results ranged from 0 to 20% annualized.

So if you invest $3,000 now, your worst-case scenario is the zero return, meaning you'll finish the decade with the same $3,000 balance. Your best case is the 20% return, resulting in a decade-ending balance of about $18,500. Those are very rough numbers, and hopefully my math is correct.

Historically, the zero returns occurred if you entered the market in about 1922, 1928, 1964 or 1999.

The 20% returns occurred starting at about 1918, 1949, the early 1980s, and after the 1987 crash.

It sounds like it's very much worth the risk for you, but luck is a factor.
 
« Last Edit: July 23, 2014, 07:39:47 PM by ect »

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Large Cap vs Mid Cap Indexing
« Reply #10 on: July 23, 2014, 08:00:31 PM »


Thanks! I am trying to understand what you mean. Bottom line though, i am assuming, is that investing a large portion of my income in VTSAX is never a bad idea. Is that a safe and financially wise decision?

Money that you need in 5 years shouldn't be in the stock market. Money you need in 15+ years should be. In between you need to decide how you would feel if the money isn't there when you need it.