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I just finished John Bogle's The Little Book of Common Sense Investing, and I think I am convinced that investing in index funds is a great idea.

I thought that choosing an index fund would be simple, but on the Vanguard website itself, I was really mesmerized to see that there are plenty of index funds to invest in. Most of them are not all-market funds as the book describes it to be.

However, I simplified my choice between two indexes:

  1. S&P 600 (Small Cap)
  2. S&P 500 (Large Cap)

Since S&P 500 is so popular, it is a obvious to invest in it because if you want to cover entire market (almost) then it is the way to go.

BUT after looking at year to year performance of small-cap fund year-to-year since 1994 (20 years) it is very clear that small caps have beaten large caps almost every year.

Even the most popular argument against S&P 600 that these stocks are more dangerous and volatile is beyond me because in both 2000 and 2008, which is considered the most dangerous period to be in stock market in last 20 years, small cap has beaten large caps.

Any reason to not invest in S&P 600?

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For most investors the ideal answer is a mix of large cap, mid/small cap, bonds, international,and perhaps REIT. These categories each offer different risk/reward tradeoffs, and may move independently of each other; diversifying is generally wiser than concentrating in a single sector. The best percentages of each will vary depending on your time horizon, your comfort with volatility and risk, and how important it is to you that you "win" rather than simply doing well. (I've posted a summary of my own portfolio in response to another question, many months ago.)

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