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Why do people favor total US Stock over just s&p 500

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  • Why do people favor total US Stock over just s&p 500

    Apologies for my ignorant/ naive question: Why do people favor total US Stock over just s&p 500.

    When I look at the returns at 1, 3, 5 years, s&p 500 still looks marginally better; and even during recession times, the lows are marginally lesser in s&p 500.

    However, I do see that the  total stock market appears to have posed slightly better returns at 4.3% compared to s&P's 3.8% since inception. Is that it?

    or Am I missing something very basic and would appreciate everyone's input.

    Obviously, somehow I opened just s&p 500 when i started out a year back and funded the money mainly into that and now I am wondering if I have to invest equal money into the extended market to simulate the total US market or if I would be okay to continue just investing in the s&p 500 index funds.

    Thanks so much

  • #2
    Not naive or ignorant at all. The S&P 500 is the 500 largest companies in the USA. TSM includes small and mid-cap companies. I favor neither for 100% of a portfolio because you are eliminating international companies, which should be included to capture world growth.

    If I had to choose between the 2, I would choose TSM because of the small- and mid-caps. They are like teenagers - unpredictable but growing at a faster rate. Large companies are more settled adults. Both are important to a population.

    Another thought - you are looking through the lens of short-term results, which is not a good measure of long-term returns.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      First thing to understand is that past performance does not predict future results.  In fact often just the opposite give the cyclical nature of asset classes.  Looking at 1, 3, & 5 year returns is almost useless.

      People like to invest in the "total market" precisely because they don't want to make bets that the largest US companies will outperform.  While large cap US companies have been a hot streak the last several years, historically the returns from smaller companies have been considerably higher, but with more risk and volatility.

      That said, you will probably not experience all that much difference in investing in an S&P 500 fund vs a total stock market fund.  No need to change if there will be negative tax consequenses.

      More important is to control other things that will affect your returns more substantially, such as keeping fund fees as low as possible, rebalancing to maintain your asset allocation, and sticking to an investment plan and not changing (ie don't sell stocks when market is down!)


      • #4
        I don't favor either one.  I do see the potential benefit in owning mid & small caps, which are included at no additional charge with a Total Stock Market fund.  At least with Vanguard, the expense ratios of the 2 are the same.

        I own both VTSAX and VFIAX in my taxable account as tax loss harvesting partners.  This market has given me several opportunities to trade back and forth between the 2.  They are not identical, but track closely enough for me to consider them interchangeable in my portfolio.

        I have small and mid caps in my tax deferred accounts, so if I were to have only S&P500 in taxable, I would still have small & mid cap exposure.




        • #5
          Thanks a lot. Makes lot more sense. 


          • #6
            Bogle prefers total stock mkt and 20% of equity allocation to intl index fund, if you desire intl

            he is not a big believer in owning intl stocks