Small-Cap Investing

In the article Investing for Life on the Smoother Path by Chris Pedersen explores how combining a target-date fund with a U.S. small-cap value fund-a simple 50/50 "Two Funds for Life" strategy, can potentially lead to higher long-term returns without adding unmanageable risk.

He argues that this pairing takes advantage of small-cap value's historically higher expected returns while maintaining the broad diversification and glide path of a target-date fund. Over 40 years of consistent saving, the results can be striking.

But this approach also requires conviction, especially during market downturns when small-cap value can underperform.

👉 Would you consider using this type of 50/50 strategy? Why or why not?

Do you prefer the simplicity of a single target-date fund, or do you think it's worth adding a little "tilt" for potentially greater growth?

Would love to hear everyone's perspectives on this. how do you balance simplicity, diversification, and return potential in your long-term investing plan? Read the full article here.

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Jenna Brashear
AAII Community Manager
Chicago, IL
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Would you consider using this type of 50/50 strategy? Why or why not?

Absolutely NOT! I would never invest in, nor would I recommend to anyone I cared about, a target date fund. For the life of me, I cannot understand why they are so popular. I guess it's just that the general public has such a deficiency of understanding about investing. Target date funds GUARANTEE a lower long-term rate of return on invested assets than a 100% equities fund could provide. All you have to do is look at the 10-year returns on the available funds in your 401k. In every one I've ever seen, the target date funds have higher expense ratios and worse performance than at least one of the 100% equities alternatives.

I have my wife's 401k invested (100%) in the Vanguard Institutional Index fund, which has a 0.04% expense ratio. Over the six years or so that she's had it, her annualized return is 16.43%, which isn't bad for a 401k. That fund's 10-year annualized return is reported as 15.27%. All of the available target date funds for her 401k have expense ratios of 0.30%, and the highest annualized 10-year return is 11.50% (that for a retirement date of 2055). Those with closer retirement dates have pathetic 10-year returns of less than 10%.

The notion that target date funds reduce risk is based on the fallacious concept of volatility-based risk. One who is planning for retirement needs to think long-term, and for a long-term investor, volatility is to be ignored.

The author of the referenced article seems to be advocating a "spend-down" approach to retirement. The concept of a "glide path" is just that. One is gliding assets toward zero as one goes through retirement. That idea is horrifying to me. I want my assets to continue growing---forever. 

Just my humble opinions, as always.

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Rob Adams
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