Confused about Large Caps. Talk me out of them...

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investment guy
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Confused about Large Caps. Talk me out of them...

Post by investment guy »

Large Cap Mutual Funds: I have a "crush" on Large Caps. They have performed SO WELL over the last decade. I understand diversification and history shows that asset classes take turns leading the pack... It seems to me like Large Caps are so well positioned currently and in the future with the uber strong tech stocks leading the way.

Your thoughts on this subject please?

I'd also like your advice on this please: MFEKX (MFS Growth Fund R6) is one of my top holdings (I have a 60/40 split in multiple mutual fund stock/bonds). I have been gradually siphoning off the winnings from MFEKX (up an average of 19% per year over the last 9 years) to fuel other holdings in an effort to diversify. Seems like a good strategy to me. I am "feeding" the following funds with my winnings from MFEKX:

VINIX Vanguard Institutional Index Fund
VIEIX Vanguard Extended Market Index Fund
VVIAX Vanguard Value Index Fund
VTSNX Vanguard Total International Stock Index
DODIX Dodge and Cox Income Fund (Bonds)

***I do NOT have access to Vanguard Total Stock Market Index (that is why I chose VINIX + VIEIX) to simulate Total Stock.

I am concerned that I am weakening my position on a large cap fund that has preformed well, however, it seems like the right strategy in an effort to diversify.

Thanks for your help!
chassis
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Re: Confused about Large Caps. Talk me out of them...

Post by chassis »

What are your financial goals? Are you retired? Are you receiving Social Security? Are you earning wages/salary?

Have you achieved your retirement "number" which means a quantified dollar figure by a date certain?
tibbitts
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Re: Confused about Large Caps. Talk me out of them...

Post by tibbitts »

investment guy wrote: Thu Jul 22, 2021 8:47 pm It seems to me like Large Caps are so well positioned currently and in the future with the uber strong tech stocks leading the way.
Why do you believe your analysis of the relative pricing of large cap vs. other stocks is more accurate than the consensus view?
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investment guy
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Re: Confused about Large Caps. Talk me out of them...

Post by investment guy »

Firstly, Thanks for the replies, greatly appreciated.

Answers to the feedback received so far:

***I should have entitled the original post: Confused about large Cap GROWTH Funds (I mistakenly left out GROWTH).

What are your financial goals? Are you retired? Are you receiving Social Security? Are you earning wages/salary?:
75% achieved to my financial goals. Plan on retiring in approximately 4 years. I will qualify for Social Security in 2 years. I am earning wages (salary)

Have you achieved your retirement "number" which means a quantified dollar figure by a date certain?
75% achieved, close to being on pace to meet a quantified dollar figure by retirement.

Why do you believe your analysis of the relative pricing of large cap vs. other stocks is more accurate than the consensus view?
Great question, again I should have listed my original post as Large Cap GROWTH, not Large Cap. Amateur here, I don't really know what the consensus view is. I am trying to make the correct counterintuitive play to increase diversification into other asset classes such as value, blend, international in large cap, mid cap and small cap.
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Re: Confused about Large Caps. Talk me out of them...

Post by TheDDC »

VIGAX is a good growth fund, so I would not talk you out of that one if you were going to invest there. It's a boring fund but over long term it does well against the S&P. I invest part of an inherited IRA in this fund and it has done well. Even though there is significant overlap with VTSAX, it holds its own even during wild market swings.

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Re: Confused about Large Caps. Talk me out of them...

Post by pkcrafter »

MFEKX is matched by Vanguard's Growth Index Fund over the past 10 years, but the Vanguard fund has outperformed MFEKX over the past 3 and 1 years. There is no magic in MFEKX.


Paul
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chassis
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Re: Confused about Large Caps. Talk me out of them...

Post by chassis »

These companies have done so well because they are profitable and growing. Why are they profitable and growing? They supply products and services that more and more customers want, and they are supplied by the company effectively. Software companies for example make a product, the software, which increases human productivity. This is a fundamental driver of profitability and standard of living.


QQQ
FTEC
VUG
MSEQX
the ARK funds have done well but are too volatile for me, and I tolerate volatility fairly well in my view.
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Re: Confused about Large Caps. Talk me out of them...

Post by Gundy »

Sounds like chasing performance to me.
"I look at a hundred deals a day. I pick one." -Gordon Gekko
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Re: Confused about Large Caps. Talk me out of them...

Post by HootingSloth »

If you look at the differences in performance over longer time periods, does it reduce your enthusiasm? It's fine if the answer is that you still want to tilt in this direction, but you should be prepared for underperformance and be able to stick with your strategy.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
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Re: Confused about Large Caps. Talk me out of them...

Post by Triple digit golfer »

chassis wrote: Fri Jul 23, 2021 6:16 am These companies have done so well because they are profitable and growing. Why are they profitable and growing? They supply products and services that more and more customers want, and they are supplied by the company effectively. Software companies for example make a product, the software, which increases human productivity. This is a fundamental driver of profitability and standard of living.
Sure, that's why they have done well. But that doesn't mean the stock will do well in the future unless they outperform expectations. And I'd say that expectations are pretty high right now.

In other words, nothing new. It's the old "priced in" argument.

That's what make picking stocks, sectors, styles so difficult. You logically think to yourself, "these companies are going to do so well!" Yes, they probably will do well in the sense that they'll have high revenue and high profitability. But that has little to do with the stock price because that is already expected and therefore priced in. The only way a company can outperform expectations is to, well, outperform expectations.
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Re: Confused about Large Caps. Talk me out of them...

Post by tibbitts »

investment guy wrote: Thu Jul 22, 2021 10:25 pm Amateur here, I don't really know what the consensus view is. I am trying to make the correct counterintuitive play to increase diversification into other asset classes such as value, blend, international in large cap, mid cap and small cap.
If you had asked a few years ago the overwhelming consensus would have been that large growth was the most despised domestic equity category, second only to the even more despised small-cap growth. But Bogleheads are a fickle bunch, so your suggestion hasn't been dismissed outright as it would have been then.
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Re: Confused about Large Caps. Talk me out of them...

Post by Kenkat »

Gundy wrote: Fri Jul 23, 2021 7:27 am Sounds like chasing performance to me.
Sounds like the opposite to me. Moving from a large growth concentrated portfolio (which fortunately happened to be the right place to be recently) to a more diversified portfolio. It includes funds that are more representative of the total market, including international equities and bonds. The value fund adds a bit of a slant that’s been discussed at length here so I won’t rehash it.

I’d be supportive of the moves you are making, OP. You happened to be in the right place at the right time for a number of years but the portfolio you are proposing is better overall in my opinion.
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Kenkat
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Re: Confused about Large Caps. Talk me out of them...

Post by Kenkat »

tibbitts wrote: Fri Jul 23, 2021 8:49 am
investment guy wrote: Thu Jul 22, 2021 10:25 pm Amateur here, I don't really know what the consensus view is. I am trying to make the correct counterintuitive play to increase diversification into other asset classes such as value, blend, international in large cap, mid cap and small cap.
If you had asked a few years ago the overwhelming consensus would have been that large growth was the most despised domestic equity category, second only to the even more despised small-cap growth. But Bogleheads are a fickle bunch, so your suggestion hasn't been dismissed outright as it would have been then.
This is absolutely true in my opinion. Things slowly cycle here between “should I dump X” and “I gotta get more of X”. Usually it feels like if you did the opposite, things would have turned out best.
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Re: Confused about Large Caps. Talk me out of them...

Post by retired@50 »

investment guy wrote: Thu Jul 22, 2021 8:47 pm
Your thoughts on this subject please?
Have you read the book by Jeremy Siegel called "Stocks For The Long Run"?

It discusses lots of market history and the large cap growth chasing that has gone on in the past. There is such a thing as paying too much for a stock. When a company first shows some promise, people get excited and bid up the shares, then things can get taken to extremes. What seems obvious to everyone now (Apple, Amazon) really wasn't that obvious back in the late 1990s or during the tech crash in the early 2000s.

Regards,
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Re: Confused about Large Caps. Talk me out of them...

Post by Living Free »

I can see why you'd have a fondness for the large cap growth stock funds, given large growth has done well lately. But, as you seem to already know, there is no guarantee that will continue, and some concern that it will "revert to the mean." And then in the near future large cap growth might not do as well. I try not to tilt my portfolio at all, which helps me minimize regret about my decisions (in truth, I have a bit of a US tilt for my stocks, but it's not a very strong tilt).

In any case, I think you should come up with a written plan for your asset allocation. It seems like you don't have one now (please correct me if I'm wrong). It can be very simple. For instance, 40% US high quality bonds, 40% US stock market stocks market cap weighted, 20% international stocks market cap weighted. Or a nice low fee broadly diversified target date fund if you're investing only in tax advantaged accounts and like the target date fund options available in your workplace retirement plan.
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Re: Confused about Large Caps. Talk me out of them...

Post by nisiprius »

The very phrase "crush" suggests an issue, because you should try to keep emotions out of investing, and analogies to personal affection are particularly dangerous. MFEKX doesn't care about your feelings and isn't going to reward you for being faithful or get angry at you for two-timing. Of course you know this with your left brain, but what about your right?

One thing you should try is this. Use PortfolioVisualizer's backtest tool. It will take about twenty minutes to get the hang of it. Then try a comparison backtest between your favored 100% MFEKX and, keep it simple, imagine where your portfolio might be in a while if you gradually shift... say... perhaps... 75% MFEKX and 5% each of the other five. Not to see which would have been better, but to see how much difference it would have made. My guess is that it would have made surprisingly little difference. Try it.

In the past, there would have been about a 92% correlation between MFEKX and the total market. You can argue and bicker about time periods and reasons and so forth, but large-caps are 75% of the market, and if you are holding about 75% of the market is doesn't matter an awful lot which 75% you are holding, it just can't be all that different from the whole market.
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Re: Confused about Large Caps. Talk me out of them...

Post by chassis »

Triple digit golfer wrote: Fri Jul 23, 2021 8:18 am
chassis wrote: Fri Jul 23, 2021 6:16 am These companies have done so well because they are profitable and growing. Why are they profitable and growing? They supply products and services that more and more customers want, and they are supplied by the company effectively. Software companies for example make a product, the software, which increases human productivity. This is a fundamental driver of profitability and standard of living.
Sure, that's why they have done well. But that doesn't mean the stock will do well in the future unless they outperform expectations. And I'd say that expectations are pretty high right now.

In other words, nothing new. It's the old "priced in" argument.

That's what make picking stocks, sectors, styles so difficult. You logically think to yourself, "these companies are going to do so well!" Yes, they probably will do well in the sense that they'll have high revenue and high profitability. But that has little to do with the stock price because that is already expected and therefore priced in. The only way a company can outperform expectations is to, well, outperform expectations.
Ah yes, the ole “can’t predict the future” notion. Past performance is no guarantee of future results. Of course.

@Triple Digit Golfer, are you retired or receiving Social Security? What is your asset allocation?

I am not receiving SS and my AA is 90% stocks.

People who start claiming SS radically shift their risk appetite. I have seen it up close multiple times. Posts from SS claimants are influenced by their own (low) risk appetite. Many investors tolerate higher risk and are compensated for it.
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Re: Confused about Large Caps. Talk me out of them...

Post by Triple digit golfer »

chassis wrote: Fri Jul 23, 2021 11:52 am
Triple digit golfer wrote: Fri Jul 23, 2021 8:18 am
chassis wrote: Fri Jul 23, 2021 6:16 am These companies have done so well because they are profitable and growing. Why are they profitable and growing? They supply products and services that more and more customers want, and they are supplied by the company effectively. Software companies for example make a product, the software, which increases human productivity. This is a fundamental driver of profitability and standard of living.
Sure, that's why they have done well. But that doesn't mean the stock will do well in the future unless they outperform expectations. And I'd say that expectations are pretty high right now.

In other words, nothing new. It's the old "priced in" argument.

That's what make picking stocks, sectors, styles so difficult. You logically think to yourself, "these companies are going to do so well!" Yes, they probably will do well in the sense that they'll have high revenue and high profitability. But that has little to do with the stock price because that is already expected and therefore priced in. The only way a company can outperform expectations is to, well, outperform expectations.
Ah yes, the ole “can’t predict the future” notion. Past performance is no guarantee of future results. Of course.

@Triple Digit Golfer, are you retired or receiving Social Security? What is your asset allocation?

I am not receiving SS and my AA is 90% stocks.

People who start claiming SS radically shift their risk appetite. I have seen it up close multiple times. Posts from SS claimants are influenced by their own (low) risk appetite. Many investors tolerate higher risk and are compensated for it.
I am not retired, nor receiving Social Security, nor will I have a pension upon retirement. I am 36 and we hold an 80/20 AA.
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Re: Confused about Large Caps. Talk me out of them...

Post by Nicolas »

investment guy wrote: Thu Jul 22, 2021 10:25 pm ***I should have entitled the original post: Confused about large Cap GROWTH Funds (I mistakenly left out GROWTH).
As you are the OP why don’t you correct the thread’s title?
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burritoLover
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Re: Confused about Large Caps. Talk me out of them...

Post by burritoLover »

Keep in mind that investor sentiment about U.S. large caps is extremely positive right now. Besides the high valuations, which generally predict lower long-term returns, sentiment can change in the future. Right now it is all about how large caps (especially growth companies) absolutely dominate their industries. In the future, the sentiment about large cap growth could be that they are behemoths too large to get out of their own way. Nimble, smaller companies can better react to changes in their markets, investors may think. It doesn't matter what may be more accurate - it matters what the aggregate of investors believe. And they'll rotate out of a popular asset subset leaving you to hold the bag if you concentrated your portfolio too much.
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investment guy
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Re: Confused about Large Caps. Talk me out of them...

Post by investment guy »

Thanks everyone, I really appreciate it. More on this please: I AM a proponent of TOTAL STOCK/BOND FUNDS. Currently we have approximately:
$500K in Total Stock/Bond Funds
$300K in MFEKX (MFS Growth Fund R6)
$460K in Bonds

As stated above, I am gradually moving more $ from MFKEX to Total Stock/Bond Funds, utilizing the strong performance of MFEKX Large Cap to fuel the other funds. Should I continue to do so? Alternatively do you think that I should rip the band aid off and move most of MFEKX to Total Stock/Bond Funds. I am very reluctant to so because of this performance of MFEKX:

MFEKX Since inception: 19.29% (2011)

5 Year: 22.93%

3 Years: 22.76%

1 Year: 31.73%

In the last 9 years, the fund has surpassed 30% FOUR times.

The fund has not lost $ in any year since inception.

In ONLY 2 of the past 9 years the fund’s performance was lower than 7.49% (2.68% and 2.55%).

*** I am keeping in mind that virtually all Large Cap Growth funds have excelled over the last 10 years.

*** I am keeping in mind that the fund is relatively new, it has NEVER BEEN TESTED DURING A DIFFICULT TIME FOR LARGE CAP GROWTH FUNDS. This concerns me.

*** I am keeping in mind that 44% of the $ in the fund resides in the Top 10 (heavily weighted). As I see it, that is both “good and bad”.

There are only 76 Stocks in the Fund. The top 10 with the following % of the top 3:

Microsoft: 10%

Amazon: 9%

Google: 5%

Adobe

Facebook

Mastercard

Paypal

Apple

Visa

Thermo Fisher Scientific

SUMMARY: I truly, truly am not trying to chase performance and have been systematically moving more and more to Total Stock/Bond. With that said, it seems so counterintuitive to slide mostly out or almost out of MFEKX as this Large Cap Growth tilt has literally transformed our Portfolio, really want to stay on the surfboard while the waves keep coming in (4 more years to go, goal is within sight). With 24% of our stock/bond total tied to MFEKX, it does not seem like too strong of a tilt. This is what I am asking. Is this hybrid approach of mostly total Stock/Bond with Large Cap Growth tilt a good strategy? My reasoning is large cap stocks tend to be higher rated/lower risk companies with lower volatility. People that are interested in "low volatility" would be looking at a form of a large-cap tilt.

I appreciate you. Thanks again! What say you?!

***I do NOT have access to Vanguard Total Stock Market Index (that is why I chose VINIX + VIEIX) to simulate Total Stock.
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Re: Confused about Large Caps. Talk me out of them...

Post by Beensabu »

You do realize that VINIX, VVIAX, and VTSNX are all large cap funds as well, right?

And VINIX is essentially a watered down large cap growth fund (at least compared to MFEKX)?
investment guy wrote: Fri Jul 23, 2021 8:18 pm Currently we have approximately:
$500K in Total Stock/Bond Funds
$300K in MFEKX (MFS Growth Fund R6)
$460K in Bonds
Okay. That is confusing. What is your stock/bond ratio? And what percentage of your stocks are in MFEKX?

I see that you've said you're 60/40, and "24% of our stock/bond total tied to MFEKX".

Is your stock/bond ratio 60/40 with 40% of your stocks in MFEKX?

If so, then that is how you need to talk about this.

Because that is a pretty significant tilt.

Do you believe in it? In US large cap growth? In the top 10 companies in MFEKX? Knowing that you also hold those companies (and a significant percentage of the top 3) in VINIX?

Or do you believe in MFEKX?

That's the question. Do you believe in your tilt? Or do you believe in the fund through which you hold most of that tilt?

Don't believe in a fund. Believe in what the fund holds. Either you do, or you don't. Either you'll hold it whenever it sucks, or you won't.

So do you? Or don't you?

My reading of it is that you don't. You're happy with what it's given you, but you don't believe in it. Not to the extent of 40% of your stock allocation. It's starting to scare you. If I'm not wrong about that, then you may want to reduce it to the point where you do still believe in it, in order to avoid behavioral errors down the road.
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Re: Confused about Large Caps. Talk me out of them...

Post by sf_tech_saver »

(TLDR: risk adjusted VOO IS the winner)

On some level, Warren Buffet agrees with you and recommends the S&P 500 vs. Vanguard Total market funds (VTI) and international!

I call this the Bogle vs. Buffet vs. Vanguard rap-battle -- VOO (S&P 500) vs. VTI (Total USA) vs. VT (Total world) -- and anyone who is only having this debate about investing can't really help but win.

Savings rate should by far trump any difference between these three great options.

That said -- Warren is probably right -- for the average index investor the additional volitiliy of VTI (really the XVF portion, or the EMO index as I affectionately call it) and VT aren't adequately compensated.

Head over to Portfolio visualizer and punch in a portfolio of VO0, VTI, VT going back to 2011. Notice the Sharpe and Sortino ratios are best on VOO ... and total CAGR, and it has the lowest max draw down. Over much longer time-frames the index breadth arguments have their moments.... but generally Warren Buffet doesn't waste words of advice.

I personally pick investments based on the 'I'll never sell' mentality so I prefer VTI and VT because they are even lazier in my mind -- even if less risk efficient. After building up a portfolio primarily of VTI I've started buying 50/50 of VTI/VT this year to add some international. Not because I think it will out perform VOO, but because I don't want to have to even consider what I would do if it did for a long period of time. I'd be covered.

Risk adjusted: VOO wins.
Lazy Adjusted: 50/50 VTI/VT wins

Savings rate trumps the above debate though.....

Party on!
VTI is a modern marvel
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Re: Confused about Large Caps. Talk me out of them...

Post by dogagility »

Beensabu wrote: Fri Jul 23, 2021 9:38 pm Don't believe in a fund. Believe in what the fund holds. Either you do, or you don't. Either you'll hold it whenever it sucks, or you won't.

So do you? Or don't you?

My reading of it is that you don't. You're happy with what it's given you, but you don't believe in it. Not to the extent of 40% of your stock allocation. It's starting to scare you. If I'm not wrong about that, then you may want to reduce it to the point where you do still believe in it, in order to avoid behavioral errors down the road.
OP, with emphasis on the bolded text, this is the crux of the matter in question.

If you're going to tilt, you need to emotionally and theoretically believe in the tilt. Otherwise, you might performance chase into other tilts, or (worst case), sell to fixed income during a deep dive.

Nobody can make this decision for you. However, your posts imply you are not convinced of the tilt.

If you reallocate to a total market index fund, will you believe in this portfolio... or do you want to somehow "beat the market"? I'd suggest you should just try to capture the market's return... it might bring you piece of mind and more time for other non-investment-related activities.
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investment guy
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Re: Confused about Large Caps. Talk me out of them...

Post by investment guy »

Just a quick note to thank everyone for their input. I appreciate the time you spent in an effort to help.
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Re: Confused about Large Caps. Talk me out of them...

Post by hnd »

Not for nothing but that fund hasn't beaten it's index in 30, 25, 20,15,10 year periods. A simple large cap growth index fund would of been cheaper and netted you more return.
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Re: Confused about Large Caps. Talk me out of them...

Post by esteen »

investment guy wrote: Thu Jul 22, 2021 10:25 pm
Why do you believe your analysis of the relative pricing of large cap vs. other stocks is more accurate than the consensus view?
Great question, again I should have listed my original post as Large Cap GROWTH, not Large Cap. Amateur here, I don't really know what the consensus view is. I am trying to make the correct counterintuitive play to increase diversification into other asset classes such as value, blend, international in large cap, mid cap and small cap.
Hey investment guy,

The consensus view is the current price in the market. The price is made up of how much all the major players are willing to pay for the stock, based on their analysis (pretty much driven by large institutional investors and wall street analytics teams). So, since we know you as a single investor don't have more analytic "firepower" than the consensus (they have thousands of quants looking at these every week), you would have to feel you had some analytic or knowledge-based advantage in order to be confident they'd outperform their current expectations (which is baked into their current stock price).

Hope that helps explain it.

I agree it's the right strategy to diversify!

-es
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Re: Confused about Large Caps. Talk me out of them...

Post by chassis »

@investment guy

Chase performance, you will catch it. Ignore tritisms from naysayers.
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patrick013
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Re: Confused about Large Caps. Talk me out of them...

Post by patrick013 »

Take it for what it is worth but someone said today that LC Value
should be considered especially post COVID. LC Growth obviously
put up some numbers and looks like it has peaked to that author.
age in bonds, buy-and-hold, 10 year business cycle
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