This has been a difficult week, so I’ve been doing less writing that usual. The good news is that I have quite a few ideas for future articles.
I recently had a bit of an epiphany. For years, I’ve been investing in Vanguard’s Total Market Index (VTI). My philosophy was that holding all the stocks in one low-expense purchase is the way to go. It’s such a boring thought that almost everyone agrees it is a smart move. In fact, half of you have probably stopped reading this. That’s how boring it is.
I still think that investing in the VTI is a good way to go for many, but I’m thinking of switching up my asset allocation.
The “problem” with VTI is that it’s become extremely heavily weighted in a few companies. You can see the holdings here. You have scroll down a bit and look to the right, but you’ll see the top 10 holdings are 18.70% of the total assets. Five the top six companies are tech… the big names like Apple, Microsoft, Amazon, and Google.
I don’t see any of those companies going away any time soon, but it’s a lot of eggs in that very concentrated area.
What if we invested in a different way. What if we looked at Vanguard’s small capital ETF, VB. It’s holdings are here. (Same deal, you need to scroll a bit and look at the right.) The top ten holdings aren’t the popular names. These are small companies after all. One of the things that stands out to me is that the top 10 holdings are only 3% of the index.
If any one of those companies went away, it’s not going to bring it down much at all. So isn’t it more diversified? It also doesn’t feel like all the companies are in the same industry.
Finally, one could make the argument that small companies might have more room to grow earnings and go up.
I’m not sure how I came to this epiphany, but part of it was that I was thinking about the value of buying local. There’s nothing particularly local about buying a small cap index, but the total market has some big companies that probably don’t need my investment. (The small ones would laugh at the fraction of a share purchase as well.) It just feels like I’m investing more in the mom and pop companies when I’m invested in the small caps.
What does this mean for actually investing performance? Probably not much. Over the long haul, the two indexes are highly correlated, so maybe I am overthinking this.
Realistically, I’d still want to have some money in VTI, but I think I might do more of a 50-50 mix instead of the 90-10 that I have now. What are your thoughts? Let me know in the comments.
Our US stock allocation is about 25% small/mid cap. From what I understand, these companies perform well during the good years. They have more room to grow and more flexibilities. VB dropped more during the recent correction. I guess it evens out.
Lazy Man says
That sounds about right. I just wonder if in the past the major indices have been so tech heavy. I think in the past corrections people may fly to safety to big consumer staples which may have helped those big indexes.
I’d love to see a “Luddite” index fund – as in, all the stocks that would be in the regular all-market index, minus Technology stocks with P/E ratios over, say, 50 (with a policy of starting to sell them off when they hit 35 or 40)