Small Cap, Large Cap, Growth, Value, International Index Investing

So which index funds should you invest in? Bogleheads, followers of Jack Bogle the man who created the first index fund and Vanguard, would say all you need is a Total US Market Equity Fund and Total US Bond fund at the right allocation percentage and then call it a day.  Warren Buffet tells people asking for investment advice that he’s instructed the manager of his estate to put his widow’s inheritance 90% in the S&P 500 and 10% in bonds. Burton Malkiel recommends a mix of Large and Small Cap US domestic equity funds, International and emerging market index funds, REITs and Total Market Bond funds. What advice do I follow?




I’m a huge fan of Burton Malkiel, author of A Random Walk Down Wall Street, and his investment advice.  I’m in a mix of small, mid, and large cap domestic funds, international and emerging market funds, Domestic and International REIT’s as well as Total Market Bond Funds. 

Many, including Warren Buffet and Jack Bogle, don’t see the need to invest in international markets and believing the US will provide a reliable enough return to ensure a comfortable retirement.  The other part of the argument is that 40% of profits for the S&P 500 come from overseas making a US total market portfolio diversified enough.

My position is that the US makes up only 40% of all stocks traded internationally.  As a strong believer in diversification, I feel I need to hedge my bets across international borders in Total International and Emerging Market Funds.  Also, the US market has been experiencing returns well above the historical average since the 2008 Great Recession making US stocks expensive while international markets are undervalued post Great Recession.  Typically assets that have outperformed recently tend to later under perform. 

Small cap indexes like the Russell 2000 include stocks with market capitalizations (number of shares outstanding times the price of the stock) below $3.5billion.  Small cap companies are typically smaller newer, companies.  Large Cap indexes like the S&P 500 include large established companies like Apple, Walmart, Home Depot, and Exxon.  Larger companies are later in their growth cycle and so they don’t have the growth potential of small cap companies-after all Amazon was once a small cap stock.  The Russell 2000 has historically delivered a 2-3% higher average annual return versus large cap stocks.  But with the higher return for small caps comes higher risk.  Small companies are more likely to go out of business than their larger more established large cap peers.  In between large caps and small caps are midcaps which still have higher growth potential relative to large caps but because they are more established come with slightly less risk.

Within the market cap categories are value and growth subcategories.  Growth stock are fast moving companies with high upside growth potential where value stocks are trading below their inherent value e.g. low price to earnings ratio.  Historically, small cap value stocks have had strong performance.

REITs are real estate investment trust.  REITs are stocks of companies that own income producing real estate like shopping malls, apartments, and commercial properties.  REITs are unique in that they have to pay out 90% of income to investors.  Historically REITs have had strong returns. Though stocks, they provide some diversification from other equities because they tend to move differently than the overall market.

Assets in my portfolio:

Small Caps
  • iShares S&P 600 Small Cap Index ETF (Ticker: IJR)
  • Fidelity Russell 2000 Small Cap Index Fund (Ticker: FSSVX)


Mid-Caps
  • iShares S&P 400 Mid Cap Index ETF (Ticker: IJH)
  • Fidelity Russell Mid Cap Index Fund (Ticker: FSCKX)


Large Caps and Total Market Funds
  • iShares Total Market S&P 1500 ETF (Ticker: ITOT)
  • iShares NASDAQ ETF (Ticker: ONEQ)
  • Fidelity NASDAQ Index Fund (Ticker: FNCMX)
  • Fidelity S&P500 Index (Ticker: FUSVX)
  • Fidelity Total Market Fund (Ticker: FSKTX)


International
  • Fidelity Global Market Fund excluding US (Ticker: FSGDX)
  • An Emerging Market Fund unique to my company’s plan
  • iShares MSCI Total International Market (Ticker: IXUS)


Bonds and REIT
  • Fidelity US Bond Fund (Ticker: FSXTX)
  • Fidelity Real Estate Index (Ticker FSRVX)


Sector Investing

  • iShares MSCI International Technology ETF (FTEC)

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