Our Financial Zen Portfolios own every stock on the planet.
But we do NOT just invest in a Total Stock Market Index Fund.
Instead we break it up into their individual pieces. Why?
Because the sum of the parts is greater than the whole.
For a simple illustration, let’s use large-cap, US stocks.
Owning an S&P 500 Index Fund is good.
What’s even better is breaking up the S&P 500 into its individual pieces:
1. S&P 500 Growth Index
2. S&P 500 Value Index
You still own every stock in the S&P 500, but by separating out growth and value, you open up opportunities for rebalancing.
When you rebalance, you either:
1. Sell what’s done WELL recently before it drops
2. Buy what’s done POORLY recently before it pops
During most economic cycles, growth outperforms on the way up and value outperforms on the way down.
So if you own each one separately, then you can ride the wave up with growth stocks and then take those gains (before they drop) to reinvest in value stocks (before they pop).
And then you can ride the wave down with value stocks and then take those gains to reinvest in growth stocks before THEY pop.
And on and on and on…
You can’t do that if you only own the S&P 500.
So owning a total stock market index is good.
What’s better is breaking it up into its individual components and taking advantage of rebalancing.
