Author Topic: small % in Vanguard Small Cap Index Fund for get max ROI after market settels ?  (Read 542 times)

shortduck

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Hello

Right now my 100% 401k contributions go to VTSAX.

Because the markets are volatile now and to get max ROI, will it be ok to do around 15% to Vanguard Small Cap Index Fund  [VSMAX] and 85% to VTSAX?

The idea is that Small is more volatile and hence will bounce back more at compared to a total market index fund, and when the returns are "good" after 1-2 years and I can sell them and get VTSAX.

Please let me know what do you think of this plan ?

shortduck

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anyone please ?

skeptic

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I'm not expert on this but I'll take a crack.

(1) I think your general approach is probably correct... if you could actually get in at the bottom of VSMAX and VTSAX, then VSMAX is more likely to rise more over the next couple of years. That was definitely true in the recovery following 08-09.

(2) The first problem with implementing it is that there's really no way to know where the bottom is or "when the dust settles" except in hindsight. At any point, it might look like the dust has settled, and then they'll both drop more... and VSMAX could certainly drop relatively more.

(3) But really, it's a total crapshoot based on chance and I can think of a bunch of reasons VSMAX could perform worse. For instance, maybe (I don't know) the market bottoms in May and things seem on the way to recovery, you buy in, but then it turns out when the weather gets colder we have another wave of virus, lots more social distancing for another six months, and a lot of companies in VSMAX declare bankruptcy and shareholders are wiped out.  There are lots of other scenarios, and I'm not arguing for positive or negative on VSMAX, but at this point no one knows what is going to happen, no one knows how things will play out or how it will affect companies, and everyone's best guess (which is not necessarily accurate) is represented by the values of VSMAX and VTSAX.

I don't personally feel like I know more than the market about VSMAX vs. VTSAX, but you might.

BicycleB

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I think it might work, but includes enough dangerous assumptions for me to hesitate. My thought process:

1. VTSAX already includes small cap stocks. You don't need to do more than that.
2. VSMAX is more volatile, but how do you know that will work in your favor? If the market goes down some more, you could lose instead of win.
3. How will you decide when the right time to sell is? Any strategy that assumes you can "tell" or "see" prices by "common sense" is harder than it looks.
4. One way of benefiting from volatility is to maintain a fixed % of two separate indexes and periodically rebalance to that %. For example, 80% VLCAX and 20% VSMAX. But then you never sell all the way out, you just rebalance to 80/20 every year (or quarter).
5. VTSAX doesn't do that exactly, but comes close. Already. Automatically.

With all that said, my guess is that you would get a slight advantage from your plan. And if you're early in your investing career, your plan will do little harm, while being a good experience. But the risk-adjusted return on putting effort into tactics like this is lower than we usually imagine, while the risk-adjusted return on other activities (like work, or car repair, or learning real estate) is usually higher.

There's a forum member called @chasesfish who FIREd last year from his banking job. If I understand him correctly, he says that up until your first $1 million of investments, usually it's better to focus on work and saving while using relatively simple and stable investing strategies. I would give you the link but I can't find the article among the many good ones on his website.

https://stopironingshirts.com/


Radagast

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In theory you are right, but 20% is too small to have a big enough effect to bother. Go 50% or 100% or there’s not much point. Even then you might be looking at 0.1% or 0.2% difference. Which will be outweighed by whichever does better.

chasesfish

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Here's my favorite recommended reading:

https://www.collaborativefund.com/blog/the-biggest-returns/

The biggest lesson I've learned in hindsight is if you're under a million dollars, just invest in the index and stop trying to tinker.  If you want to tinker, go walk a dog on Wag or pickup groceries for someone via Instacart.  You'll make more than spending hours and hours of researching trying to beat the market without the risk of trailing the market.

Radagast

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OK I backtested this for 2008-10 and in fact dollar cost averaging into Vanguard Small Cap instead of S&P500 did in fact boost returns by 3% annualized, for a few extra thousand dollars (depending on how much you put in). See link below, which is not necessarily an endorsement of the specific funds shown.

Remember to subtract "time weighted returns" from "money weighted returns" because you want to compare the strategy of buying small company stocks, and not the relative performance of small vs large (which is independent of your actions). Don't assume that one will have higher returns than the other.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2008&firstMonth=1&endYear=2010&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=VFINX&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VB&allocation1_1=100&symbol2=IJR&allocation2_2=100&symbol3=RZV&allocation3_3=100