Interesting Article on Vanguard Total Stock Market Index

[4n6]

I was reading this article on Marketwatch about Vanguard's Total Stock Market Index fund and thought I would get thoughts from fellow Mustachians out there. http://www.marketwatch.com/story/why-vanguard-total-stock-market-isnt-the-best-fund-in-the-fleet-2014-12-03?page=2

Thoughts?

[Melf]

I'm kind of interested to hear some opinions on this as well from the more experienced investors here.  This author says that we only have about 3% exposure to small-cap value stocks by using VTSMX/VTSAX.  Do we want more exposure or would that go against what we're generally trying to do here?  Is this just a matter of the authors opinion differing from that of several others?  I know there are a lot of different AA's out there. 

[myDogIsFI]

He's just raising the old debate between value tilting and total market investing.  He's a proponent of value tilting.

See, e.g., this thread on BH:
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=151204

[brooklynguy]

The article is misleading.  At first blush he appears to be arguing that the Vanguard Total Stock Market Index Fund does not live up to its claim of accurately representing the entire US stock market because it underweights small cap stocks.  But that's not really what he's arguing--instead, he is arguing that you will get the best returns by overweighting small cap stocks in your portfolio.  So he's saying that Vanguard should in fact inaccurately represent the total US stock market, by overweighting small cap stocks.  That makes no sense.  If you want to tilt towards small caps, you should buy a total market fund and add a small cap fund, or buy a fund that holds itself out as a total market fund with a small cap tilt.  But a fund that calls itself the "Total [US] Stock Market" should represent just that.  Otherwise, if that's what I want, I have to buy that fund, then add some large cap exposure to "untilt" the tilt.

[LLCoolDave]

This author is an idiot. When Buffet sees a promising small cap company they aren't listed on the NYSE. Owners come to him and he buys the company outright. Also, if you believe the S&P 500 is slightly overvalued, small caps are much worse. I was a shareholder in PRNHX (50% return for 2013) and in the last prospectus they said to stick to your asset allocation and not chase returns (i.e. small caps are way overvalued). They literally said "Rebalance!" The author here is spouting historical facts without taking in the current market.

[Beric01]

This author is missing the point entirely. With Vanguard Total Stock Market, you own the entire market. It's the ultimate diversification. So, good or bad, you'll perform as the entire market does. "Tilting" is simply returns chasing. Past performance is not an indication of future results.  Who knows if small caps will continue to outperform in the future? By owning the entire market, we don't need to take that risk.

I've yet to see any reason to move beyond a 3-fund portfolio of Vanguard Total Stock Index, Total International Stock Index, and Total Bond Index.

[skyrefuge]

So he's saying that Vanguard should in fact inaccurately represent the total US stock market, by overweighting small cap stocks.  That makes no sense.

That's not really what he's saying. He doesn't want Vanguard fund to change, he wants the advice given by Vanguard advisers to change. He thinks they should be pushing a small-cap value tilt rather than just recommending Total Stock Market. So the story is really just "different investment advisers have different ideas on the optimal investment portfolio". No shit!

[brooklynguy]

I think he goes farther, at least in his implications if not in his explicit argument.  The title of the article is "Why Vanguard Total Stock Market isn't the best fund in the fleet", implying that there is a flaw with the fund itself.  In the article, he states:

But this fund falls far short of its "total market" title. In fact, the fund gives investors only a small part of what it takes to diversify a portfolio into the best asset classes. This is no small matter, since that diversification accounts for more than 90% of an investor's likely return.

implying that the fund should be weighted differently to earn its "total market" title.

He then goes on to recommend how Vanguard's advice should change (to favor a small-cap tilt approach), but in the context of the entire article it is couched as a solution to the perceived problem of the inadequacy of Vanguard's total market fund (i.e., its lack of tilt in the first place).

[skyrefuge]

I think he goes farther, at least in his implications if not in his explicit argument.

Ah, I didn't notice that the original link took me straight to the second page of the article. I thought it seemed pretty short and lacking in preamble! :-) Yes, reading the first page now made a dumb article even dumber. Especially since his line "To add a meaningful boost to the S&P 500, an index needs value stocks" strongly implies that TSM does not hold those value stocks at all, when, of course it holds a superset of the companies in any other US stock fund.