Gyroscopic Investing

At the risk of bringing a dead horse back to life, I wanted to ask a couple of questions on the stock portion of the PP.

Due to limited space in my tax deferred account, I have half the stock portion in VTI in a taxable account and the other half in a combination of S&P 500, S&P 400, Russell 2000, EEM, and EFA index funds (all ultra low expense ratios) in a 401k.  VTI is not an option in the 401k.  I have decided to eliminate the international (I already invest in foreign equities in the VP and I want to simplify) and am trying to decide between trying to replicate VTI with the three US oriented index funds, just use the S&P 500, or maybe tilt towards mid and small cap.

Using daily data I believe I have found that a nearly 90% mix of S&P500 along with 5% S&P 400 and 5% Russell 2000 replicates the VTI return (somewhat surprising since I thought the S&P 500 accounted for around only 80% of the total market cap).  I don't mind doing the slice and dice, and can stick to it, but can anyone tell me why I shouldn't bother and just go with the S&P 500?  Also, after looking at the returns from '91, I am sorely tempted to tilt even more toward small and mid cap.  I know the future could be different, but it still seems intuitive to me to use more volatile equities (per the original HB recommendation, even though HB seemed to change his mind later) and since there has historically been a greater return to small/mid cap stocks.

Any suggestions?  Am I counting angels on a pin head?

If your 401(k) has iShares IWV that's the Russell 3000 which is virtually identical to Vanguard Total Stock Market in terms of performance and composition.

If you just have to use a small cap fund, then I'd pick the S&P600 Small Value (iShares IJS) if available over the Russell 2000. I think the S&P index is better constructed and has less turnover. It also keeps weak companies and companies with IPOs but no profits out of the index (which are generally not good buys).

Or you can just use the S&P 500 and not worry about this stuff because your primary diversification comes from owning stocks, bonds, cash and gold and not splitting up the stocks so much.

I have an a question about VTI and VTSMX somewhat related to this topic.

In a taxable account with Vanguard would it be better to use an ETF or an Index Fund for the stock portion of the PP?  I ask because I believe that one can simply exchange between Vanguard funds (e.g. VTSMX to Vanguard MM account) without triggering capital gains, since an EXCHANGE is not a SALE.  Please correct me if I'm wrong, but for rebalancing purposes this might be advantageous.  As of yet, I do not see the option to exchange shares of, say, EDV for share of VTI, but again, I could be wrong. 

Exchanges are definitely sales. The transaction will be taxed at whatever short/long term capital gains rate is applicable.

For Vanguard there is not much difference in the ETF and open ended fund if they are both the same. That is because Vanguard's ETFs are a share class of the open ended fund. By setting things up this way Vanguard can boost tax efficiency of the overall fund using the ETFs as an outlet for frequent trades and disposing of stocks in a way to minimize gains for shareholders.

craigr wrote: Exchanges are definitely sales. The transaction will be taxed at whatever short/long term capital gains rate is applicable.

He may be thinking of the different types of tax free exchanges described in Sections 1031-1036 of the Internal Revenue Code, though I don't think the transaction he is describing would qualify for tax free treatment.