Thread: Why allocate across a variety of funds?

Welcome Ryan. Good questions.

I do believe over the long term (20 plus years) the small caps have actually done better. My thoughts on this is that each fund has its moments. Early in an economic recovery you'll find small caps do better as interest ratesare dropping. Later on in the recovery smaller companies start feeling the effects of interest rate hikessince they tend to have higher debt than thelarger companies of the S&P 500. We are currently seeing that transer as the C fund has weathered this pullback a little better than the S.

That said, the small caps are more volatile and could see a nice recovery if the market ever rallies. They have done really well the past two years, but for the next year or so, I believe it's the larger stocks' turn.

The I fund should be considered in a buy and hold account. If you are not going to watch your account very closely, youprobably don't want to putmuch more than 15% of your account in the I fund.It can be very volatile. If you plan to time the market at all you have to follow the movement of the dollar carefully when using the I fund. You can make some good money if you play it right.

So if you time the market you can take advantage of the economic cycles by using the funds wisely. If you buy and hold you may want to spread it out so you are not missing the peaks of each fund.

I hope that helps.
Tom

Ryan,

Severalreasons from a somewhat different perspective:

1. In the 90's the C Fund was the best performer. However, in the 80s the I Fund (EAFE) frequently outperformed the S&P 500. Historically, small stocks, the S fund, have provided the best returns. Therefore, if you can predict which fund will perform the best, go with 100% of that fund. However, under the assumption it is impossible to predict the best performing fund, it's prudent to invest your assets across multiple funds.

2. The I and F Funds usually non-correlate with the C & S Funds, i.e. they often move in opposite directions. Therefore, when the C/S Funds are down, the F/I funds are up. This non-correlation effect tends to lower portfolio risk.

3. Using a mean-variance optimizer (based on Markowitz's Nobel prize winning work) and historical data to plot the efficient frontier, a portfolio of:

9% F; 27% C; 13% S; and 51% I yields the same average annual return as 100% C (12.2%) at 2.6% less risk (16% standard deviation vs. 18.6%). Although it is unlikely that anyonewouldrecommend this portfolio allocation, it does demonstrate the power of diversification.

For additional information on this critical subject, see John Bogel's Common Sense on Mutual Funds and Burton Malkiel's A Random Walk Down Wall Street.

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