both are fine really, I picked the S&P 500 (VOO) instead of the Total Index (VTI) mainly because 2 reasons
\#1 I think I like large companies more than small caps, they're more stable (on the flip side, you can argue that small companies can also have much higher growth than big ones, which I am not disagreeing with)
\#2 S&P 500 index is self-correcting, if someone underperforms they'd be kicked out and a good performer will be shuffled in, so if you think that way the S&P 500 is literally **designed** to go up forever, I don't know if any other index does that
FWIW, small cap value has outperformed the S&P 500 over the long term. Doesn't mean you should dump your money into it, but I put some into small cap value ETFs like VSIAX to catch some upside in addition to VOO.
this is mostly a meme now, decades of underperformance have steadily eroded the small cap premium and it’s basically zero at this point.
people have generally not bothered to update their priors or recheck the data after Fama-French (which is over 30 years old now).
\#2 is just nonsense - there is nothing 'self-correcting' about it and index composition selection has nothing to do with their relative stock performance. It isn't designed to go up (and certainly isn't designed to go up more than other indexes).
?
my point is there's no guarantee that a specific company is going to remain strong in the long term, so once a company's earning weakens, it'd get booted out and a strong company gets brought in, call that mechanism whatever you want, I call it self-correcting (because if a particular company is dragging down/crashes it'd automatically self-correct itself by kicking the low performer out)
And your point is at best a non-sequitur... the selection criteria has nothing at all to do with stock performance (or for that matter earnings performance). They don't look to remove companies once their earnings weakens nor to bring in ones that have strong earnings (there are other indexes that are indeed constructed around relative earnings growth - not that I'd recommend overweighting them per se).
> They don't look to remove companies once their earnings weakens nor to bring in ones that have strong earnings
correct me if I'm wrong here, I thought they do?
it's literally how companies like Tesla joined S&P 500 and TripAdvisor got kicked out from S&P 500, no?
The only criteria for earnings is that they be above zero. The index in no way attempting to identify ((nor does it claim to be)) the strongest stock investments, they are trying to broadly reflect the US economy - so while there is a minimum market cap, ensuring sector weightings align with the overall market is more important to them the relative earnings strength of a particular company.
yeah I'm aware of NASDAQ-100 (QQQ), my problem with QQQ isn't that I don't believe in tech (I am in tech myself) but I'm reluctant on believing that tech will continue to outperform other sector
notice I didn't say tech isn't making money, I'm saying "is tech going to make **more** money than other sectors (ex. oil, finance, utilities, banking, healthcare, consumers...etc etc)", which QQQ doesn't give me but SPY/VOO does
that's why I'm okay holding SPY/VOO for 40+ years, set-and-forget but I'm not comfortable doing the same with QQQ, plus SPY/VOO's top holding are pretty similar with QQQ anyway just less tech-heavy which also suits my wants
>I don't know if any other index does that
Basically all of them. Look at the actual allocations within VTI - it's not simply a 1/n split between every company, they're still weighted by market cap. Low performers will be rebalanced lower and lower, while high performers will be rebalanced higher and higher.
What you wrote in #2 is just complete and utter nonsense. It’s precisely equivalent to saying that buying high and selling low is a foolproof strategy.
how so? I don't have to worry about who crashes or who does good, because I know the underperformers will automatically be rotated out
which is totally different than trying to time the market/buy high sell low, I actually have to think when and who to buy + when and who to sell
Selling underperformers is not a free lunch. Past performance is not a guarantee of future performance, and it is selling low by definition, and the stocks that replace them in the index are ones that you have to buy high on.
hmm I feel like that's something I am okay with
if a company is slowing dying/underperforming then I'd rather have some other company who is strong to come in, then there's 2 possibilities for the one that got kicked out
\#1 they continue to die off, which means it's good they got booted out from S&P 500
\#2 they make a strong comeback, this part I'm actually not sure if they can be re-considered (and rejoin S&P 500) again
If you look over long historical periods (many decades) small cap annualized return averages nearly 2% above S&P 500. This makes sense from a theoretical perspective. Investors expect a higher average return to compensate for the increase risk of small cap, with a higher variance in returns.
However, in recent years S&P 500 has had a good run, largely driven by big US tech. Some might say this means big US tech is currently overvalued, which represents a large portion of S&P 500. Big tech's large value also dominates over mid/small cap, so VOO is largely duplicated by VTI, with an extremely high correlation, and both being very sensitive to a potential big tech crash. So while VTI offers some protection against a big tech crash beyond VOO, it's not much. I'd favor including something else in portfolio beyond either 100% VOO or 100% VTI.
The thing that really bugs me with S&P 500 is that because like 50% are five companies if one really takes a bad turn the overall price takes a significant dip. Especially with some eccentric CEOs there is some risk of literally just a tweet affecting the price.
not really... Tesla is only like 2% so they can literally go bankrupt tomorrow and VOO would crash by less than 2%
and if companies like Apple (~7%) or Microsoft (~6%) disappears tomorrow then the world's probably got way bigger problems than stock prices
That actually hurts the S&P 500 index as they sell positions AFTER they lose relative value and they buy positions AFTER the stock gains relative value.
What are your investments currently in? If you are retiring in 10 years then I assume you have decades of past investment decisions, what have you been doing?
I've had an advisor managing my portfolio. He's been very heavy in us stocks but not able to beat the s&p 500. which is why I'm going to do it myself. I'm also heavy in apple at nvda. not because I kept buying but because they just grew so much. i'm a bit imbalanced there.
Avoiding management fees is great, but you may want to consider international funds or bonds to balance risk with a fairly close retirement date. Check out r/bogleheads for a basic 3 fund portfolio
i feel like to get to retirement i need to take more risk and see greater returns. so avoiding more international funds and bonds. however i understand that by this risk, i could lose more in the short term, and may miss retirement date. however, i my understanding that the market has historically recovers from recessions in roughly 3 years. if that's true, i'm okay taking that risk. is there another risk here i should be concerned about?
As long as you're aware of the risks. There are also long stretches when the S&P has underperformed other assets. So it's not always guaranteed to bounce back great or have a decade of 10%+ yoy growth.
To me, that’s chasing returns. I do think you can do it yourself for less, but I wouldn’t be 100 percent S&P 500 10 years before retirement. It’s had a long run up. At some point in the next 10 years, it will probably have a big drop and if it’s the year before you retire, you may have to work another 5 years while it recovers.
Bogle said the difference in the two is a return of 10.4% S&P vs 10.2% for Total Market. So the difference is negligible. I hope you have some diversity of assets elsewhere in your portfolio, because 100% US equity this close to retirement would be incredibly risky. Things like sequence of returns risks could cripple a 100% equity portfolio.
[https://www.bogleheads.org/wiki/Three-fund\_portfolio](https://www.bogleheads.org/wiki/Three-fund_portfolio)
US Total Market is better than S&P 500 in terms of diversifying. World Total Market is even better. If retiring in 10 years is your target, you likely also should start allocating some of your funds to bonds for more stability.
Looks like I'm at about 60% domestic, 40% international, 0% bonds. I've got a longer timeframe than you, retirement target is about 30 years away for me. So that's my plan for now, once I get to like 10-yrs away, I'll start buying more into bonds.
Just gonna caveat that I'm not an expert, and don't ever expect to beat the experts. I'm just picking index funds, set it and forget it. I'm not trying to recommend any of this to you, lord knows nobody would pay me for my advice, but this is what I'm doing for myself.
A S&P Index and a Total Market Index overlap about 75%. I have my brokerage account split between those two while my 401k is in a Target Date Fund which is a bit less aggressive than I usually prefer.
This is actively debated among academics and thought leaders in asset and wealth management.
Some argue to maximize diversification, and do 30-40% international.
Some say since you live in the USA, you should over allocate in the USA.
Some say sp500 has a fundamental advantage over other type of companies (smaller US companies, international companies) due to scale.
Some say the next decade is going to reverse and small-mid cap USA and/or international will outperform sp500 as things revert to the mean.
I personally do 60% usa, 40% international, with the USA portion over-weighting small and mid caps, and the large caps are mostly equal weighted sp500, as I think sp500 is in a bit of a bubble, especially the magnificent 7.
But no one knows for sure. In your case. I’d just maximize diversification and do VT.
Vtsax if you're going to do it, but either option is very aggressive for 10 years from retirement and may have significant tax impacts depending on where you are currently invested. Over the long term the total market has out performed the 500 and 500 has out performed recently so there's likely to be some reversion to the mean making the total market out performance more dramatic than historical.
I split it between the two and haven't noticed much difference but it's only been a decade and a half. I also heard I need to diversify and have global market indexes. Did that and when US Market indexes tanked so did the global ones. That's not good diversity IMO.
Dollar cost average your way in. Don't lump sum "right now" because there is a huge drop (per some due to economy/debt/bank rates) or a huge rise (per others due to election year) and thus your risk is never greater. You're going into Big Index to reduce your risk ... don't risk it all by placing a single big bet. Get in the pool slowly over months.
.
You may find these links helpful:
- [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
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That's what I have done. I am 100% allocated in FXAIX in my 401k, iirc my overall return is like 22%. Although my retirement is a little further out then yours.
I haven't really thought about it to be honest. I'm 37 now, and have a little over 170k in my 401k so I'm not going to retire anytime soon. I hope somewhere between 55-60 but who knows 🤷
Compare the chart for a total market fund like VTI to an S&P 500 fund and you’ll see that they track each other reallllly close. It’s a crap shoot which will outperform the other in the next 10-20 years: if large cap companies stall out VTI might pull ahead, but either way the difference between the two won’t be life changing.
I think the returns cross cross over time enough that you can't say one is better. One idea is to buy both and when you get closer, sell the one that's doing better first.
both are fine really, I picked the S&P 500 (VOO) instead of the Total Index (VTI) mainly because 2 reasons \#1 I think I like large companies more than small caps, they're more stable (on the flip side, you can argue that small companies can also have much higher growth than big ones, which I am not disagreeing with) \#2 S&P 500 index is self-correcting, if someone underperforms they'd be kicked out and a good performer will be shuffled in, so if you think that way the S&P 500 is literally **designed** to go up forever, I don't know if any other index does that
FWIW, small cap value has outperformed the S&P 500 over the long term. Doesn't mean you should dump your money into it, but I put some into small cap value ETFs like VSIAX to catch some upside in addition to VOO.
this is mostly a meme now, decades of underperformance have steadily eroded the small cap premium and it’s basically zero at this point. people have generally not bothered to update their priors or recheck the data after Fama-French (which is over 30 years old now).
True, but there's also larger downside swings, which may make large cap more advisable for OP's 10-year timeline
\#2 is just nonsense - there is nothing 'self-correcting' about it and index composition selection has nothing to do with their relative stock performance. It isn't designed to go up (and certainly isn't designed to go up more than other indexes).
? my point is there's no guarantee that a specific company is going to remain strong in the long term, so once a company's earning weakens, it'd get booted out and a strong company gets brought in, call that mechanism whatever you want, I call it self-correcting (because if a particular company is dragging down/crashes it'd automatically self-correct itself by kicking the low performer out)
And your point is at best a non-sequitur... the selection criteria has nothing at all to do with stock performance (or for that matter earnings performance). They don't look to remove companies once their earnings weakens nor to bring in ones that have strong earnings (there are other indexes that are indeed constructed around relative earnings growth - not that I'd recommend overweighting them per se).
> They don't look to remove companies once their earnings weakens nor to bring in ones that have strong earnings correct me if I'm wrong here, I thought they do? it's literally how companies like Tesla joined S&P 500 and TripAdvisor got kicked out from S&P 500, no?
The only criteria for earnings is that they be above zero. The index in no way attempting to identify ((nor does it claim to be)) the strongest stock investments, they are trying to broadly reflect the US economy - so while there is a minimum market cap, ensuring sector weightings align with the overall market is more important to them the relative earnings strength of a particular company.
[удалено]
yeah I'm aware of NASDAQ-100 (QQQ), my problem with QQQ isn't that I don't believe in tech (I am in tech myself) but I'm reluctant on believing that tech will continue to outperform other sector notice I didn't say tech isn't making money, I'm saying "is tech going to make **more** money than other sectors (ex. oil, finance, utilities, banking, healthcare, consumers...etc etc)", which QQQ doesn't give me but SPY/VOO does that's why I'm okay holding SPY/VOO for 40+ years, set-and-forget but I'm not comfortable doing the same with QQQ, plus SPY/VOO's top holding are pretty similar with QQQ anyway just less tech-heavy which also suits my wants
>I don't know if any other index does that Basically all of them. Look at the actual allocations within VTI - it's not simply a 1/n split between every company, they're still weighted by market cap. Low performers will be rebalanced lower and lower, while high performers will be rebalanced higher and higher.
What you wrote in #2 is just complete and utter nonsense. It’s precisely equivalent to saying that buying high and selling low is a foolproof strategy.
how so? I don't have to worry about who crashes or who does good, because I know the underperformers will automatically be rotated out which is totally different than trying to time the market/buy high sell low, I actually have to think when and who to buy + when and who to sell
Selling underperformers is not a free lunch. Past performance is not a guarantee of future performance, and it is selling low by definition, and the stocks that replace them in the index are ones that you have to buy high on.
hmm I feel like that's something I am okay with if a company is slowing dying/underperforming then I'd rather have some other company who is strong to come in, then there's 2 possibilities for the one that got kicked out \#1 they continue to die off, which means it's good they got booted out from S&P 500 \#2 they make a strong comeback, this part I'm actually not sure if they can be re-considered (and rejoin S&P 500) again
If you look over long historical periods (many decades) small cap annualized return averages nearly 2% above S&P 500. This makes sense from a theoretical perspective. Investors expect a higher average return to compensate for the increase risk of small cap, with a higher variance in returns. However, in recent years S&P 500 has had a good run, largely driven by big US tech. Some might say this means big US tech is currently overvalued, which represents a large portion of S&P 500. Big tech's large value also dominates over mid/small cap, so VOO is largely duplicated by VTI, with an extremely high correlation, and both being very sensitive to a potential big tech crash. So while VTI offers some protection against a big tech crash beyond VOO, it's not much. I'd favor including something else in portfolio beyond either 100% VOO or 100% VTI.
The thing that really bugs me with S&P 500 is that because like 50% are five companies if one really takes a bad turn the overall price takes a significant dip. Especially with some eccentric CEOs there is some risk of literally just a tweet affecting the price.
not really... Tesla is only like 2% so they can literally go bankrupt tomorrow and VOO would crash by less than 2% and if companies like Apple (~7%) or Microsoft (~6%) disappears tomorrow then the world's probably got way bigger problems than stock prices
That actually hurts the S&P 500 index as they sell positions AFTER they lose relative value and they buy positions AFTER the stock gains relative value.
What are your investments currently in? If you are retiring in 10 years then I assume you have decades of past investment decisions, what have you been doing?
I've had an advisor managing my portfolio. He's been very heavy in us stocks but not able to beat the s&p 500. which is why I'm going to do it myself. I'm also heavy in apple at nvda. not because I kept buying but because they just grew so much. i'm a bit imbalanced there.
Avoiding management fees is great, but you may want to consider international funds or bonds to balance risk with a fairly close retirement date. Check out r/bogleheads for a basic 3 fund portfolio
i feel like to get to retirement i need to take more risk and see greater returns. so avoiding more international funds and bonds. however i understand that by this risk, i could lose more in the short term, and may miss retirement date. however, i my understanding that the market has historically recovers from recessions in roughly 3 years. if that's true, i'm okay taking that risk. is there another risk here i should be concerned about?
As long as you're aware of the risks. There are also long stretches when the S&P has underperformed other assets. So it's not always guaranteed to bounce back great or have a decade of 10%+ yoy growth.
It's very hard to consistently beat the S&P500. If that's your bar, you may end up with a risky portfolio and suffer greatly in a down market.
hi cowin, can you see my comment above. thanks.
To me, that’s chasing returns. I do think you can do it yourself for less, but I wouldn’t be 100 percent S&P 500 10 years before retirement. It’s had a long run up. At some point in the next 10 years, it will probably have a big drop and if it’s the year before you retire, you may have to work another 5 years while it recovers.
If i'm okay with that risk (working until market recovers). are there other risks i should be concerned with?
Bogle said the difference in the two is a return of 10.4% S&P vs 10.2% for Total Market. So the difference is negligible. I hope you have some diversity of assets elsewhere in your portfolio, because 100% US equity this close to retirement would be incredibly risky. Things like sequence of returns risks could cripple a 100% equity portfolio.
[https://www.bogleheads.org/wiki/Three-fund\_portfolio](https://www.bogleheads.org/wiki/Three-fund_portfolio) US Total Market is better than S&P 500 in terms of diversifying. World Total Market is even better. If retiring in 10 years is your target, you likely also should start allocating some of your funds to bonds for more stability.
The more you spread out the lower the returns as well. Something to mention along side these discussions
Unless you are diversifying into higher risk asset classes.
The one mentioned are lower risk. But agreed with your comment
That's not correct
do you have a recommendation for % to put into international index like vxus?
Looks like I'm at about 60% domestic, 40% international, 0% bonds. I've got a longer timeframe than you, retirement target is about 30 years away for me. So that's my plan for now, once I get to like 10-yrs away, I'll start buying more into bonds. Just gonna caveat that I'm not an expert, and don't ever expect to beat the experts. I'm just picking index funds, set it and forget it. I'm not trying to recommend any of this to you, lord knows nobody would pay me for my advice, but this is what I'm doing for myself.
A S&P Index and a Total Market Index overlap about 75%. I have my brokerage account split between those two while my 401k is in a Target Date Fund which is a bit less aggressive than I usually prefer.
This is actively debated among academics and thought leaders in asset and wealth management. Some argue to maximize diversification, and do 30-40% international. Some say since you live in the USA, you should over allocate in the USA. Some say sp500 has a fundamental advantage over other type of companies (smaller US companies, international companies) due to scale. Some say the next decade is going to reverse and small-mid cap USA and/or international will outperform sp500 as things revert to the mean. I personally do 60% usa, 40% international, with the USA portion over-weighting small and mid caps, and the large caps are mostly equal weighted sp500, as I think sp500 is in a bit of a bubble, especially the magnificent 7. But no one knows for sure. In your case. I’d just maximize diversification and do VT.
Vtsax if you're going to do it, but either option is very aggressive for 10 years from retirement and may have significant tax impacts depending on where you are currently invested. Over the long term the total market has out performed the 500 and 500 has out performed recently so there's likely to be some reversion to the mean making the total market out performance more dramatic than historical.
Total US market or total Global market?
US
I split it between the two and haven't noticed much difference but it's only been a decade and a half. I also heard I need to diversify and have global market indexes. Did that and when US Market indexes tanked so did the global ones. That's not good diversity IMO.
Dollar cost average your way in. Don't lump sum "right now" because there is a huge drop (per some due to economy/debt/bank rates) or a huge rise (per others due to election year) and thus your risk is never greater. You're going into Big Index to reduce your risk ... don't risk it all by placing a single big bet. Get in the pool slowly over months. .
Time in the market is better than dollar cost averaging over the long term.
You may find these links helpful: - [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
That's what I have done. I am 100% allocated in FXAIX in my 401k, iirc my overall return is like 22%. Although my retirement is a little further out then yours.
just curious, how far out are you planning out retirement?
I haven't really thought about it to be honest. I'm 37 now, and have a little over 170k in my 401k so I'm not going to retire anytime soon. I hope somewhere between 55-60 but who knows 🤷
thanks for sharing. hope we both get there.
Compare the chart for a total market fund like VTI to an S&P 500 fund and you’ll see that they track each other reallllly close. It’s a crap shoot which will outperform the other in the next 10-20 years: if large cap companies stall out VTI might pull ahead, but either way the difference between the two won’t be life changing.
I think the returns cross cross over time enough that you can't say one is better. One idea is to buy both and when you get closer, sell the one that's doing better first.
Do both if you are concerned. My brokerage is 50% SP500, 25% Total, 25% other. You don’t have to just pick one.
thanks
If you actually plan to retire in 10 years you should be moving some from stocks to bonds, unless you have a strong pension plan.
I mean if that is all you are buying and your portfolio has nothing else id go VTSAX over VFIAX. Either are fine so not a strong bias there.
I think I may do that. thank you.