The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Chesleygirl on July 26, 2017, 08:45:38 AM
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I have small cap, mid cap and large cap ETFs in my IRA. Since I'm interested more in index funds, I'm wondering if would be okay to liquidate those and use the money to buy more Fidelity index funds. Or should I keep the small cap, mid cap and large cap ETFs in my IRA for the sake of diversification?
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What kinds of funds are you currently holding in your IRA (ticker symbols)? Are these active funds or passive (index) funds? What are the expense ratios of these funds?
The good news are: Almost any investment strategy can be replicated with low cost index funds. Next to total market index funds, there are also small, mid and large cap index funds available. The desired mix depends on your planned asset allocation and views on how the market will develop.
Some people prefer to buy total market index funds (contains about ~20% mid/small cap, if I remember correctly). Some people prefer to overweight small caps, as there is some (debated) research regarding small caps outperforming large caps in the long run. If you just want to keep things simple, a total market fund might be the better solution, as it eliminates the need for rebalancing within your US stock allocation.
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Those small, mid, and large cap ETFs probably are index funds. Total market index funds are around 70:20:10 large:medium:small cap, percentage wise. If you held these etfs at about those percentages, your performance would mirror a total market fund.
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You are perfectly fine selling everything and using total market index funds. That is what most people recommend because it is easy and yet still has much better than "average" returns. For example, use 45% Total US, 30% Total International, and 25% Total Bond.
If you want to use a small fund as well that is perfectly OK but I suggest only one, because after that it can get complicated fast. I suggest Vanguard's small cap fund or small cap value fund as good choices because they are cheap and extend into mid cap stocks as well, so you aren't missing anything. The Bill Bernstein No-Brainer is a good way to do this:
25% S&P500, Large Cap Blend, or Total Stock Market
25% Total International
25% Total Bond (or a similar intermediate bond fund which includes treasury bonds)
25% Small Cap Blend or Small Cap Value
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No need to own a mid and small cap. Just own the total stock market index if you want that little extra risk that mid and small caps give you. Or own the S&P 500 index for a little less volatility. Or take some of your bond money and put more of that into the S&P 500 index.