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Why you shouldn't buy a Total Stock Market fund

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The problem with the Total Stock Market funds such as VTSMX (and with many other similar funds) is they are dollar weighted, not % weighted to large/small/growth/value.

From vanguard's site:
"Vanguard Total Stock Market Index Fund is designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks. "

It's true there are small value stocks in there, but by % of portfolio, those represent only a small fraction.

For this reason I buy equal % large growth index and small value index, and do another % assignment to the emerging markets side.

It's surprisingly tricky to figure out what % of the US stock market, by dollars, is Small Value. This may be representative way to determine what % is small value:

Vanguard small value  VISVX net assets: 1.95 billion
Vanguard large growth VIGRSX: 86.4 billion
vanguard large value VIVAX: 74.2 billion


That means if you buy a Total Stock Market Fund, only about 1% of your US equities is in Small Value, majority is in large growth/large value. I would want more diversification than that. 

Historically small value has outperformed large growth (but not in last 10 years). That means the performance of the total market fund should be very similar to large cap fund. Let's compare.

71.49% vs 73.38% (5 years)
174.24% vs. 169.6% (14 years)

71.49% vs. 56.52% (5 years)
121.67% vs. 303.91% (16 years)

(above) Total Large Growth vs. Small Value

(above) Large Growth. vs. Total Stock Market
Summary..
  • Total Stock Market fund is basically a  Large Cap  fund
  • Small value funds historically outperformed large cap, since 2002 up 300% vs. 115% in large cap
  • By owning a Total Stock Market Fund, you're not getting exposure to super performing Small Value index
Remember, small value companies are just that, small, and not doing terribly well. That means they have a lot of opportunity for growth. A large growth company like Microsoft does not have the same type of headroom.  It's already a grown up.


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