A. This is a very interesting comparison, for the same amount of money, an investor can invest it in Vanguard's Total Stock Market Index fund (VTSMX), or divide it into 3 index funds that track different market caps: Vanguard 500 Index (VFINX), Vanguard Midcap Index (VIMSX), and Vanguard Small cap Index (NAESX). Which portfolio will have a better return?
Someone did a comparison, using data between Jan 1, 1999 and Dec 31, 2016, the results are very interesting:
1) Vanguard's Total Stock Market Index fund performs just like Vanguard 500 Index (VFINX), and quite different from the small cap and midcap index funds' performances.
2) If you allocate the fund based on market cap of each market segment, it will be 70% to large cap fund, 20% to midcap fund, and 10% to small cap fund, then rebalance each year, the result is that the combo portfolio performs slightly better than the total market index fund.
3) If you allocate the fund equally among the three market segment funds, the result is far superior than total market index fund's performance, while volatility is at similar level.
4) Finally, the added benefit of divide and concur strategy is that in each year, if you need to take money out of the market, if you invest in just one total market fund and you are in a bad year, it will be a bigger hit to the portfolio. However, if you invest in 3 different funds, not all funds perform poorly in a bad market year, so you can always avoid taking money from the fund that down the most.
The bottom line - spread your money equally into the three market index funds based on market caps is a great strategy than putting all money into the total market index fund.