Author Topic: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet  (Read 3907 times)

bassguitar115

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I came across this article recently and listened to the author's podcast which goes into more detail.

http://www.marketwatch.com/story/why-vanguard-total-stock-market-isnt-the-best-fund-in-the-fleet-2014-12-03

His basic argument is that while VTSAX is good, it is not optimal. He argues that small-cap value stocks are underrepresented and that VTSAX purists are missing out on additional gains.

Thoughts?

Scandium

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Re: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet
« Reply #1 on: April 24, 2017, 08:51:47 AM »
hah, I knew it was a Merriman article before I even clicked it! I've read his stuff before, he always goes on about SCV funds giving greater returns. Well, they have in the past (at a time when you couldn't really buy a SCV index fund..) We can't know they will in the future, and I'm tempted to guess they probably won't. Bogle also had an analysis of small vs large and I believe he showed most of the outperformance was due to a few short periods. Beyond that there were often decade+ of underperformance. So you'd better stick with it! Personally I'd rather keep it simple and safe and own all sectors, so I know at least I'll have some in the one that proves to outperform..

nereo

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Re: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet
« Reply #2 on: April 24, 2017, 08:53:45 AM »
It seems like a good time to roll-out this oldie but goody...
« Last Edit: April 24, 2017, 08:55:25 AM by nereo »

PathtoFIRE

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Re: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet
« Reply #3 on: April 24, 2017, 08:57:52 AM »
Just to be clear, "underrepresented" here means that they are not _overrepresented_ compared to their market cap weighting. The market cap of all of the US small cap public companies is approximately 9% of all US equities, and therefore the total market indices hold the same percentage (Fidelity's total market fund FSTVX similarly holds about 9% in small and micro cap per Morningstar). Historically, as Merriman points out, small value has performed better than the SP500. Will the same hold true in the future? I don't know, maybe, maybe not. So tilt a little towards small caps if you want. Just for a point of reference, Merriman's recommended asset allocations can be found here (http://paulmerriman.com/best-class-recommended-portfolios/) and typically slice-and-dice the equity and bond markets into 10 or more narrower holdings. There's nothing outright wrong with this, you probably are paying a little more in fees, and obviously have to be a little more actively engaged in order to keep your asset allocation within limits, and maybe his tilts will give you a little more return, maybe you'll be in a position to do a little more tax loss harvesting when sectors are down. But I think it's we're still just arguing about shades of the same color, and that there's no dire consequences in story if you fail to head his warning.

AZryan

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Re: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet
« Reply #4 on: April 26, 2017, 12:44:34 PM »
I think most here know the 'Total Market', because it's market cap-weighted, is almost identical to the '500 Index'. Over the past couple decades, the concentration of even more of the money into even fewer companies at the very top has made that even more true that it already was. And even more worrisome to me.

Long term, you ought to do a TINY bit better in the Total Market than the 500 -which is 100% because you have a TINY bit of Mids and Small Caps. So what if you had a much more meaningful chunk?

I've actually preferred the Mid Cap (blend) over the Total/500 as my primary fund, and have done much better because of it. It didn't get killed in the dot com bust (no 'Lost Decade' despite being 100% stocks), and while it crashed ~5% harder in the 2008-9 crash, it recovered completely just as quickly as the overall market.

In the past decade (~2007-2017) it beat the market by a little, but pretty similar.

I do 60/30 Mid Cap and Total Market (the other ~10% in 3 tech funds). It lets you do some rebalancing within stocks if you want to (I've never bothered).

Mid Caps follows the market ups and downs almost perfectly, but have had better upside highs over the long run, and no meaningfully greater lows. The price is ~.03% higher fund fee and a bit more volatility. Def been worth it to me.

I also prefer Mids to Small Caps (whether growth, value or blend) because the Mid index is actually weighted to lots of multi billion dollar Large Caps of big names we all know. It's pretty much just a block of ~350 companies right below the top 500 (market caps actually overlap even).

That group has more room to grow than the Mega Giants, IMO. The losers get kicked out at the bottom, and kicked up at the top.

The Small Cap has to keep the lagging losers, and the Total/500 has to keep the bloated Mega Giants. I think that's why the article recommends Small Cap VALUE -because if you're risking $ on the smallest companies, it's probably wiser to aim for the ones considered safer 'value' bets.

I also notice a lot of these articles totally ignore that there even is a Mid Cap Index. They act like you're either in Large Caps or Small Caps. I hate that. Mid Caps appear to be the 'Goldilocks' Index to me -or at least they have been for many decades. They might be total shit going forward, but there's zero evidence for that guess, so I can't see any reason to change my position.

Guess this also goes with 'can you beat the market' threads. Yes... 'Overweight the Mids'.

K-12FI

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Re: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet
« Reply #5 on: April 26, 2017, 01:36:14 PM »
How I'm doing mine is my Roth IRA is 100% vbr, and my solo 401k and 457 are Vtsax/total stock market.

I also contribute the mandatory 14.5% to my teacher pension plan.

ChpBstrd

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Re: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet
« Reply #6 on: April 28, 2017, 02:42:06 PM »
A fund like SPY, with low bid-ask spreads and great liquidity in its options market might be your best bet to actually beat the index using a far-OTM covered call strategy. A hundredth of a percent higher fees than Vanguard? You make that up for a decade in your first trade.

It's another definition of "best".

MDM

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Re: Why Vanguard Total Stock Market Isnít the Best Fund in the Fleet
« Reply #7 on: April 28, 2017, 04:00:10 PM »
It seems like a good time to roll-out this oldie but goody...
+1

Beat me to it. :)