Author Topic: total stock market vs SP500  (Read 1301 times)

mistymoney

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total stock market vs SP500
« on: December 03, 2020, 09:09:52 AM »
there was some discussion on this on the tesla joining sp500 thread, but if any are willing, I'd like a more targeted discussion.

This board is the first place where I've seen concentration on the total market index vs sp500. I don't think I've seen total stock market indices available in my 401k plans much - but loads of sp500.

Which do you invest in? or percentage of each if both?

What are the pros/cons of going to one/other - and how has that panned out via results?

ender

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Re: total stock market vs SP500
« Reply #1 on: December 03, 2020, 09:16:45 AM »
SP500 is on average larger companies.

I prefer total stock market index because its... the total stock market index :-)

EvenSteven

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Re: total stock market vs SP500
« Reply #2 on: December 03, 2020, 09:25:03 AM »
This is a handy reference on how to take some more common 401K offerings and combine them approximate a total stock market fund:

https://www.bogleheads.org/wiki/Approximating_total_stock_market

cool7hand

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Re: total stock market vs SP500
« Reply #3 on: December 03, 2020, 09:26:40 AM »
+1 on @ender 's response

vand

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Re: total stock market vs SP500
« Reply #4 on: December 03, 2020, 09:29:39 AM »
It's not going to make much difference.

The S&P500 is about 75% of the total US market capitalization (see how I used the "z" there).

The bottom line difference between the two is going to be a rounding error. On this list of important things to get right, it sits about 926th.

shinn497

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Re: total stock market vs SP500
« Reply #5 on: December 03, 2020, 10:38:50 AM »


This is from portfolio visualizer. Blue is total US stock market Red is large cap, which is roughly the SP500. There is very little difference. However, if you overweight small and mid cap, you will get higher returns and arguable better diversification. This is because cap weighted indicies tilt toward large cap naturally.

joleran

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Re: total stock market vs SP500
« Reply #6 on: December 03, 2020, 02:51:46 PM »
It's not going to make much difference.

The S&P500 is about 75% of the total US market capitalization (see how I used the "z" there).

The bottom line difference between the two is going to be a rounding error. On this list of important things to get right, it sits about 926th.

Yes, but with caveats.  Small cap vs large cap has worked out favorably and unfavorably over rolling 10 year periods in the past century.  Sometimes the behavior has been very pronounced in one direction or the other.  This can make a huge difference in sequence risk, but no one knows what will be winning or losing in the years to come.

That said, making the "right" decision would be far from a rounding error in recent history.  It would profoundly change the realized returns in a way that could make or break a portfolio.  The answer, as usual, is to diversify, own a good bit of everything, accept that your portfolio will never or almost never be the winner running ahead of the pack, and stay the course.

Much Fishing to Do

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Re: total stock market vs SP500
« Reply #7 on: December 03, 2020, 03:47:17 PM »
It's not going to make much difference.

The S&P500 is about 75% of the total US market capitalization (see how I used the "z" there).

The bottom line difference between the two is going to be a rounding error. On this list of important things to get right, it sits about 926th.

Yes, but with caveats.  Small cap vs large cap has worked out favorably and unfavorably over rolling 10 year periods in the past century.  Sometimes the behavior has been very pronounced in one direction or the other.  This can make a huge difference in sequence risk, but no one knows what will be winning or losing in the years to come.

That said, making the "right" decision would be far from a rounding error in recent history.  It would profoundly change the realized returns in a way that could make or break a portfolio.  The answer, as usual, is to diversify, own a good bit of everything, accept that your portfolio will never or almost never be the winner running ahead of the pack, and stay the course.

I don't really see it. In the end they seem to be almost the same from year to year given how much of the total is weighted toward the big caps (so even when small caps do awesome or poor they just dont affect the overall much.  Like the one poster said if you overweight (or even equal weight per entity) small cap then it definitely could make a huge difference (maybe like going 50% Russell 1000 versus 50% Russell 2000, or some kind of Equal weight Total market if there is such a thing)

Now choosing between Total US Market versus Total Market (so e.g. VT vs VTI) can give VERY different results

Telecaster

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Re: total stock market vs SP500
« Reply #8 on: December 03, 2020, 04:33:03 PM »

Yes, but with caveats.  Small cap vs large cap has worked out favorably and unfavorably over rolling 10 year periods in the past century.  Sometimes the behavior has been very pronounced in one direction or the other.  This can make a huge difference in sequence risk, but no one knows what will be winning or losing in the years to come.

That said, making the "right" decision would be far from a rounding error in recent history.  It would profoundly change the realized returns in a way that could make or break a portfolio.  The answer, as usual, is to diversify, own a good bit of everything, accept that your portfolio will never or almost never be the winner running ahead of the pack, and stay the course.

Agree with your larger point, but some context in regards to the original question:  Because both indices are cap weighted, both are pretty much a large cap strategy.  That's why they track so closely. 

@mistymoney  The total market index and 500 index are pretty close to the same thing, for the reasons mentioned above.  If total market is available in your 401(K) I personally would do that.  If only 500 index is available, I'd do that and sleep like a baby.  There is no reason to split the difference between the two.

Now, if you really want to go down a rabbit hole you can stir in small and mid-cap index funds, maybe some international etc.  And there is nothing wrong with that.  That's what I do.  But there is a real beauty in just buying the whole market and being done. 

mistymoney

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Re: total stock market vs SP500
« Reply #9 on: December 03, 2020, 04:55:54 PM »
Thanks Telecaster and everyone for the discussion! I feel much more knowledgeable now.

:)

Wintergreen78

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Re: total stock market vs SP500
« Reply #10 on: December 03, 2020, 06:44:13 PM »
You made me curious. I went to FIRECalc (my favorite web site). I used all their default values, but went to the portfolio tab and chose 100% SP 500. I got an 88% success rate. For 50% SP500 and 50% small cap I got 94% success.

I wouldn’t run out and change my allocations because of it, but it is an interesting data point.

Billy B. Good

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Re: total stock market vs SP500
« Reply #11 on: December 03, 2020, 06:59:12 PM »
The expense ratios would probably make more difference than the returns. Depending on what you have available in your list of choices in your 401k. An SP500 with an expense ratio of .04% would be a lot better than a TSM fund with an expense ratio of .5%, and vice versa.

joleran

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Re: total stock market vs SP500
« Reply #12 on: December 03, 2020, 08:26:19 PM »
Yes, but with caveats.  Small cap vs large cap has worked out favorably and unfavorably over rolling 10 year periods in the past century.  Sometimes the behavior has been very pronounced in one direction or the other.  This can make a huge difference in sequence risk, but no one knows what will be winning or losing in the years to come.

That said, making the "right" decision would be far from a rounding error in recent history.  It would profoundly change the realized returns in a way that could make or break a portfolio.  The answer, as usual, is to diversify, own a good bit of everything, accept that your portfolio will never or almost never be the winner running ahead of the pack, and stay the course.

I don't really see it. In the end they seem to be almost the same from year to year given how much of the total is weighted toward the big caps (so even when small caps do awesome or poor they just dont affect the overall much.  Like the one poster said if you overweight (or even equal weight per entity) small cap then it definitely could make a huge difference (maybe like going 50% Russell 1000 versus 50% Russell 2000, or some kind of Equal weight Total market if there is such a thing)

Now choosing between Total US Market versus Total Market (so e.g. VT vs VTI) can give VERY different results

You and Telecaster are quite right.  As someone who not-quite-but-almost equal weights small caps I was projecting my outlook as opposed to considering a purely VTSAX vs VOO type scenario.

shinn497

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Re: total stock market vs SP500
« Reply #13 on: December 03, 2020, 11:02:53 PM »
Food for thought. There is just as much evidence that small cap will beat large cap as there is evidence that the market itself will always increase.