{"id":626,"date":"2021-11-08T13:00:00","date_gmt":"2021-11-08T13:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/you-might-be-overexposed-to-large-cap-diversifying-beyond-the-total-stock-market-and-sampp-500\/"},"modified":"2025-09-05T16:53:11","modified_gmt":"2025-09-05T16:53:11","slug":"you-might-be-overexposed-to-large-cap-diversifying-beyond-the-total-stock-market-and-sampp-500","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/you-might-be-overexposed-to-large-cap-diversifying-beyond-the-total-stock-market-and-sampp-500\/","title":{"rendered":"4 Simple Index Fund Portfolios That Would\u2019ve Beaten the Total Stock Market over the Last 25 Years"},"content":{"rendered":"
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Ugh, I know \u2014 how annoying is that title? Nobody has a Magic 8 ball to predict what\u2019ll happen in the future, but I have a slight issue with the idea that the only index fund you\u2019ll ever need is the Total Stock Market.<\/p>\n

And based on the funds I see constantly discussed on #PersonalFinanceInstagram, that\u2019s the favorite by a long shot.<\/p>\n

They\u2019re all, for the most part, S&P 500 or Total Stock Market index funds, both of which are Large Cap funds. <\/p>\n

As we\u2019ve discussed before on this blog, Large Cap funds are popular for new investors (new = started in the last few years, like me) because the S&P 500 has absolutely ripped for the last decade or so \u2014 and when I say \u201cripped,\u201d I mean trounced pretty much every other popular index.<\/p>\n

I think there\u2019s a bit of selection bias happening on the aforementioned personal finance Instagram, though, because most new investors are the same ones creating content on the platform. There\u2019s not a great historical representation, in this reporter\u2019s opinion, and it concerns me that we\u2019re going to #influence a new wave of investors to be way<\/em> overexposed to the popular Large Cap Crew at the expense of other indices.<\/p>\n

Why owning only Large Cap Growth funds may not be ideal<\/h2>\n

The biggest companies have more or less already experienced their explosive growth.<\/p>\n

The S&P 500 is made up of the 500 largest companies, but it\u2019s not composed equally<\/em> of the top 500 companies. Apple alone makes up around 6% of each share. <\/p>\n

And while we all love our big boys (Facebook, Apple, Alphabet (Google), Microsoft, Amazon, Netflix, etc.), these companies are already huge. A lot of their explosive growth has already happened. It stands to reason that their biggest growth \u201crips,\u201d so to speak, are behind them, and while they may maintain a steady clip of modest growth, it\u2019s unlikely they\u2019re going to double in size again.<\/p>\n

As a former Alabama student (roll tide), I\u2019d like to compare the S&P 500 to Alabama football. (Stick with me here, Rich Girls, we have to pander to our male readers occasionally.)<\/p>\n

If it were possible to purchase stock in Alabama football and you had done so in the early 2000s before Saban took over in 2007, you\u2019d have captured a ton of explosive growth as Alabama went on to become a dominant player in the college football world and won 6 national titles in 13 years. <\/p>\n

Alabama is the S&P 500 of college football. But now? Now, its recent wins are priced into its stock value<\/strong>. You\u2019re not going to get Alabama football for a bargain, because everyone\u2019s expecting them to win now. The chances that they\u2019ll become twice as good<\/em> over the next 13 years would mean they\u2019d have to win 12 of the 13 championships. As much as I\u2019d love that, I don\u2019t think it\u2019s going to happen.<\/p>\n

This is why investing heavily in Large Cap will typically net good<\/em> results, but not the best<\/em> results.<\/p>\n

How much Large Cap is too much?<\/h2>\n

Well, if your entire portfolio is in the total stock market or S&P 500, it\u2019s probably safe to say you\u2019ve got too much. You\u2019re not diversified outside of one type of index. <\/p>\n

The likelihood that you\u2019ll still get positive returns is good, of course, because you effectively own only \u201cwinners.\u201d You own Alabama, Clemson, Ohio State\u2026 and the other teams in the top 10 whose names I don\u2019t know because, well, I\u2019m an Alabama fan. (Aren\u2019t I the WORST?! LSU fans have left the chat.<\/strong>)<\/p>\n

But you\u2019re paying a premium for your winners because they\u2019re the winners<\/em>. We\u2019re all expecting them to do well, so they cost more. <\/p>\n

Having a diversified portfolio is like buying stock in European soccer teams and high school basketball teams, too. You never know where the next star will come from.<\/p>\n

For our example today, we\u2019re going to use a tool called Portfolio Visualizer.<\/p>\n

It allows us to create hypothetical portfolios and compare them over any time period we want. For the sake of capturing recent history, we\u2019ll be using a 25-year lookback today: an investing timeline from 1996 to 2021.<\/p>\n

How a portfolio visualizer tool can help<\/h2>\n

How would a $10,000 investment in different indices fare over 25 years? Let\u2019s find out. Here\u2019s the tool I\u2019m using<\/a> \u2014 it\u2019s pretty cool.<\/p>\n

Note that I\u2019m not<\/em> setting the portfolios to rebalance over time, to reflect how most retail investors behave. Sure, you may be rebalancing to keep your asset allocation even when certain indices outperform others, but I\u2019d venture a guess that you\u2019re probably not doing that on your own (some roboadvisors do it for you, for the record).<\/p>\n

For the purposes of our testing today, we\u2019re going to look at combinations of a few different indices in different proportions:<\/p>\n