Small cap diversifier in portfolio

Bostonerimus1

A common approach is to start with a core equity index fund and then use a few satellite funds to overweight in certain areas and you might use a small cap fund there. That's fine as long as you have the discipline to manage your portfolio through volatility or even do nothing at all as you see values go up and down. I decided against this approach many years ago as a simple 3 or 4 fund broad index portfolio seemed to be the best balance between risk and return. I just invested in small caps to the extent that they appeared in my equity index holding. It kept my portfolio very simple and easy to manage through market turmoil. My portfolio has basically been a US Total Market Equity Index, an International Equity Index (Ex-US), a US Total Bond Index and the Wellesley Income fund (concentrates on dividend companies and high quality bonds for income). 

Pat38493

Bostonerimus1 said:

A common approach is to start with a core equity index fund and then use a few satellite funds to overweight in certain areas and you might use a small cap fund there. That's fine as long as you have the discipline to manage your portfolio through volatility or even do nothing at all as you see values go up and down. I decided against this approach many years ago as a simple 3 or 4 fund broad index portfolio seemed to be the best balance between risk and return. I just invested in small caps to the extent that they appeared in my global equity index holding. It also kept my portfolio very simple and easy to manage through market turmoil.

The other interesting point here is that most historical stress testing simulation tools won't include the last 20 years in any results if you are looking at a 30-40 years retirement horizon.  This tends to be a weakness in historical backtesting as it excludes the most recent few decades.