The Big Debate

Twenty-five years ago, I was scrambling to get “The Coffeehouse Investor” published. The debate at that time was whether you were better off owning a basketful of high-flying dot-com stocks or owning all the stocks – the highflyers as well as the laggards - through a total stock market index fund.  

For a year at least, the dot-com stocks seemed to be winning, but it couldn’t last forever, and didn’t. With most of the highfliers crashing, investors started embracing the simple wisdom espoused by Vanguard’s Jack Bogle of capturing the entire market’s return through an unmanaged index fund.  

A quarter-century later, investors are dealing with a different debate. Is a total stock market index fund the best way to invest in the stock market, or are there benefits of including other dimensions of the market, including value, small-value, and international index funds inside your portfolio?  

First, a clarification. Traditional index funds are constructed on a “capitalization-weighted” basis, meaning a stock’s value in the fund is calculated and represented in the fund by multiplying its number of shares outstanding by its price per share.

For that reason, in a total stock market index fund, Microsoft, with a market capitalization of over $3 trillion, will carry a lot more punch in your portfolio than Bally’s (BALY), the casino and entertainment company, with a market capitalization of $500 million.

To be blunt, although a total stock market index fund has large companies and small companies, it is essentially a large-cap index fund, and performance data proves the same.  

Is there anything wrong with owning only large-cap stocks (masquerading as a total stock market fund) in your portfolio?  

It all comes down to you and your emotions. Can you stay the course, during long stretches when large-cap stocks underperform other dimensions, as they did during the ten-year period ending 2009?  

Are you sure?  

I don’t think I could, and so I hedge my emotions by owning value, small-value, and international index funds in addition to large-cap stocks.    

Oh, and there is one more BIG reason I diversify beyond large-cap stocks. We will cover that next week.

Capture Your Fair Share of the Market

If 1999, I needed to get creative in describing a Coffeehouse Investor-type portfolio to readers in my weekly column. My seven-fund portfolio took on a life of its own with investors across the nation, and I haven't looked back. Is your portfolio capturing your fair share? Can you do better? Let's discuss that and more in a complimentary strategy call with me. Your life awaits, strategize and plan with confidence.