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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Clean Shaven on May 04, 2017, 02:56:58 PM

Title: Rebalance to more mid-cap?
Post by: Clean Shaven on May 04, 2017, 02:56:58 PM
I plugged 100% of all liquid assets into Vanguard, for me and my wife, and ran an analysis report ("portfolio watch").  In Vanguard's analysis report of everything we have, Vanguard says 59.7% of all our investments are in U.S. stocks, broken down as:

Large cap 79.9% 66.0% 13.9
Mid cap 15.8% 27.0% −11.2
Small cap 4.3% 7.0% −2.7

First column is our stock portfolio.
Second column is U.S. stock market
Third column is difference (percentage pts)

According to this, Vanguard shows that in comparison to the U.S. market, we are more heavily weighted towards large caps and under weighted towards mid caps, and slightly under weighted toward small caps.

Would you reallocate in order to rebalance more towards mid-caps?  We're approximately where we want to be in terms of U.S./international stocks, and same for bonds.  Total allocation is about 75% stock, 20% bond, 5% cash.  All stocks and bonds are mutual funds, no individual shares.  Stocks are about 80% U.S., 20% international; bonds are about 70% U.S., 30% international.

I have not really paid much attention to weighting based on large/small cap.  Also, none of our funds are specific sector funds (e.g. health care); they're a mix of target date, Life Strategy, SP500, and total U.S. stock market.  (This is because funds are spread across different accounts for me and my wife, where some of the accounts have limited or less attractive (higher fee) offerings.) 

I can rebalance and increase mid-cap weighting, but want to understand whether I would want to, and why. Thanks everyone!
Title: Re: Rebalance to more mid-cap?
Post by: Clean Shaven on May 05, 2017, 10:50:22 AM
Thanks for responding.  My wife understands our joint financial plan, has full access, and is capable of handling it all. 

Back to my question about rebalancing in order to match up to the U.S. market:  we're not intentionally layering on complexity, though that has somewhat been the outcome.  The reason for how it is currently allocated is -- as I stated in the first post, though perhaps should have explained it more -- because our investments are spread across different funds as a result of limitations on the various "buckets" they are in.  Here's why:

The restrictive buckets:
- my 401k: through Vanguard, but cannot buy VTSAX.  Can buy all the Vanguard Target Date funds, which is what I'm using.
- my HSA: through Health Equity.  Many shitty funds.  However, can buy Vanguard institutional SP500 (VIIIX) at 0.02% ER, which is what I'm using.
- wife's 401k: through T. Rowe Price.  Offers many TRP target date funds, all with high MER... and also happens to offer Vanguard institutional SP500 at 0.02% ER, so 100% of her 401k is in that.  This largish amount is primarily why we are more heavily weighted in large cap.
- wife's old 401k: through Vanguard.  Left it in there, because has access to institutional Target Date (0.10%).

The non-restrictive buckets, where we can rebalance the overall holdings:
- my rollover IRA (old 401k): through Vanguard.  Currently in Lifestrategy funds.
- my Roth IRA: through Vanguard.  Currently in Lifestrategy funds.
- wife's Roth IRA: through Vanguard.  Currently in Lifestrategy funds.
- taxable account: through Vanguard.  Currently mostly VTSAX, some VFIAX.

So, we have the ability to rebalance within the non-restrictive buckets, in order to more closely match up to the total U.S. market within our U.S. stock funds.  The question is -- is it worthwhile?  Is the overweight on large caps a bad thing? (am I missing something by not having more in small or mid cap U.S.?)
Title: Re: Rebalance to more mid-cap?
Post by: Dollar Slice on May 05, 2017, 11:05:11 AM
I am going to end up with this same problem since my new 401(k) offers Vanguard S&P 500 but not VTSAX. So I'm posting to follow :-)
Title: Re: Rebalance to more mid-cap?
Post by: AZryan on May 05, 2017, 12:11:26 PM
Clean Shaven,

Yeah. I think you're very overweight in LargeCaps. But even having the 'correct' market cap balance is IMO still way overweight.

I've posted this a lot here, advocating for people to heavily OVERweight their portfolio to MidCaps. I'm 60% MidCap, 30% Total (and 10% 3 tech funds -but being 40% Total would be fine by me). Been this (give or take) for 20 years.

If you look at, it shows 100% Total Market would grow $1K in 1972 (far back as the charts go) into $78.5K in 2016 (~10% return). That's awesome! But a 60/40 MidCap/Total would be $171.2K (~12% return) with no volatility added. Far more than double the return. Will that happen in the future? Don't know, but IMO it's got a better chance of putting you ahead than behind.

When people are in 'the Total Market', since it's market cap weighted, they're heavily into the MEGACaps at the very top. Yes, the Total Market covers thousands and thousands of companies, but mostly it doesn't. You have almost nothing in all those companies you think you're invested in.

The 500 Index, which will get you almost the exact same results, covers about the top 1,000 companies (picking ~half of 'em). But again... it really doesn't 'cuz much of that still doesn't count for hardly anything. That's why the two are almost identical despite one being ~500 companies and one being ~3,500.

And the concentration of wealth into even fewer names at the top has gotten far worse in the past 20 years.

If I remember right, the top 10 companies have ~50% of the money. You're probably betting on Apple's next iWatch setting the world on fire a lot more than you think you are.

If you meant to 'invest in a little of everything' because you don't think you should be picking stocks, there's a better way to do that.

If you massively overweight the MidCaps (or both Mids and SmallCaps), you're spreading that risk around a lot better. If you look at the returns of the MidCaps, it's way better over most any timeframe. It's a tiny bit more volatile on it's own, but you actually reduce volatility if you split it with the Total Market/500 Index because it doesn't move exactly the same, and doing a bit of rebalancing will reduce volatility, too (I don't even bother, though).

Mids went through the dot com crash with little problem, while the 500/Total/LargeCaps got HAMMERED. It dropped about 5% more in the '08 crash, but recovered 100% just as fast at the Total Market -so no problem there, IMO. Did something similar in that small crash early '16.

So the 'LargeCap'/Total/500 are really MEGACaps (and Large) funds. And the MidCaps are really LargeCap (and Mids). When you mix the two, you get a true LargeCap focus spread over many more stocks. You're still in all the Megas, but their weight becomes totally reasonable. And you have a real strong investment in a lot of multi-billion dollar MidCaps which are big names we all know, and ought to have more room to keep growing compared to the few crowding the top with so much money they don't even know what to do with all of it.
Title: Re: Rebalance to more mid-cap?
Post by: Radagast on May 05, 2017, 02:03:37 PM
In theory small and mid cap stocks should have higher returns than larger cap stocks over most periods, especially while you are still making regular contributions, less certainly when making regular withdrawals. There is really no good reason to have less than market weight in mid and small caps.

There are many options for this. The simplest is a "market completion" or "extended market" index, which translates to "every company which is not in the S&P500." These are made exactly for situations such as yours, where people who only have S&P500 funds available in some accounts can get total market exposure by buying the extended market fund at a ratio of around 4:1 "S&P500":"extended market". You can also overweight it if you want for simplicity or expected outperformance. Vanguard and others also offer many other varieties of small and mid cap funds, which you can spend years agonizing over small differences.

In my opinion you are also underexposed to international stocks, you may consider adding Vanguard's international small cap fund to invest internationally and in smaller companies at the same time.
Title: Re: Rebalance to more mid-cap?
Post by: Clean Shaven on May 05, 2017, 02:26:28 PM
Thanks - I definitely have some research to do, before making changes. 

Some quick googling shows this has been debated over at Bogleheads too -- I'll do some reading over there too.

^^^ In that thread, Larimore (from Vanguard) suggested just sticking with the total stock market, and linked to this article:

Also from that thread, a transcript from a Bogle speech on this, and other approaches to weighting a portfolio:

And, a thread also suggesting a 4:1 ratio of SP500: extended market fund in order to balance it out:
Title: Re: Rebalance to more mid-cap?
Post by: AZryan on May 06, 2017, 10:06:13 AM
A lot of that (I read Bogle's run-down on it years ago) uses a dichotomy of Large and Small -as if those are your only two options -which is a really screwed-up picture. Morningstar's blocks are Small, Mid, Large, Value, Growth and Blend. But then you can see their 'focus points' of funds often land OUTSIDE those blocks. Those are MegaCaps. We need another layer of blocks, not to pretend there's even less. (note- since MicroCaps, Nano, etc. are SO small, I really don't care about those getting their own blocks. We aren't risking $ on penny stocks here).

As I said, I prefer Mids (which are heavily 'LargeCaps' really), and if you mix them with the Total Market you're getting better diversification and can counter the small volatility bump. You really create a unique LargeCap Fund.

The Total Market and 500 Index are heavily MEGACaps. It's indisputable how concentrated the money is today. The only argument is whether that's 'safely/perfectly balanced' or not. I says it's putting way too much on the shoulders of way too few companies going forward.

Bogle's paper/speech on the issue I think came down to saying SmallCaps didn't do better IF you factor in the bump in volatility (risk-adjusted return). I don't consider volatility to equal risk (because it just isn't), and that doesn't cancel out literally 'doing better'. If you're 'buy and hold', how does volatility do anything bad to you? Hasn't hurt me in 20 years and two HUGE market disasters. The only thing it's done is give me even clearer opportunities to shove extra money in (early 2016 mini-crash was the latest example of a 'turbo boost' moment I took advantage of).

It's hard to argue with the past ~45 years+ where the Total Market grew $1K into $83K, while the MidCaps became $171K. All with basically the same ups and downs of the market -just a ~1.5% better return. (SmallCap hit $158K).

That 'rethinking SmallCaps' article also meant 'risk-adjusted returns' and picked out 1982-2010 to look at. Very weird block of time, but I still see SmallCaps coming out ahead vs. Total on

'82-2017 puts SmallCaps even more clearly ahead. But the thing is that SmallCaps were WAY up compared to the Total Market in the mid 80's. So if you start the clock there, of course they're going to look their worst going forward ~18 years (and they still win!?). Rebalancing in that time with the Total market would have been solid, too.

But the Mids didn't have that unusual bump in the 80's. They did even better long-term than Small or Large with a path about as smooth as the Total Market. I just don't see any downside.
Title: Re: Rebalance to more mid-cap?
Post by: DavidAnnArbor on May 06, 2017, 08:30:44 PM
Yes I have a mid-cap index with vanguard. The expense ratio is slightly more.
Title: Re: Rebalance to more mid-cap?
Post by: AZryan on May 07, 2017, 08:33:13 AM
Yes I have a mid-cap index with vanguard. The expense ratio is slightly more.

VTSAX/VFIAX (Total and 500) are both .04% and VIMAX (MidCap blend) is .06%. I can't see this as a factor at all. And those fees were all just lowered, so VTSAX/VFIAX was .05% ~a month ago, and everyone knew that was already dead low.
Title: Re: Rebalance to more mid-cap?
Post by: AZryan on May 09, 2017, 10:04:39 AM
I know this thread was already pretty much over, but I just wanted to add that if anyone looks up 'RSP', which is the Equal-Weighted S&P 500 ETF, and compare it to the Vanguard MidCap VIMAX (or VO etf), you'll see that they're almost identical -much like how the 500 and Total Market are. But, I believe, VIMAX/VO and RSP don't share even one single company in common.

So, instead of my idea of mixing a MidCap fund and Total Market, you could have an identical result just from mixing equal and market-cap weighted versions of the exact same S&P 500 Index. I just thought that's pretty telling -and weird!
In both examples, you create a pseudo-Large/MidCap fund that still has a decent amount of the MegaCaps (and either one does better than the Total Market).
Title: Re: Rebalance to more mid-cap?
Post by: DavidAnnArbor on May 09, 2017, 11:29:05 AM
You definitely have piqued my interest in midcaps. Thanks for posting.