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From this exchange I would conclude that the "actively" managed part of the stock fund is dragging down the performance. The response from TIAA-CREF is that this is because the fund is diversified to include an international index. Perhaps, but I would argue someone made an active choice to include it. Given that many of the large companies in the Wilshire 5000 do business internationally already, that would seem to provide considerable diversification.

It's hard to say who will drag whom down in the long run. If you were writing this in the 70's you would be complaining about the Russell 3000 dragging down your great returns from the EAFE. If the newsletter guy is correct and they are composing their stock fund from two indices essentially what you have is a simple asset allocation between two different asset classes that are not completely corelated. The idea is that in the longer run you will get a better return from multiple asset classes that are rebalanced. If you know 100% for certain that in the next 10 years the Russell 3000 will outperform the EAFE then you would be foolish to not use it rather than the EAFE. If, like most of us, you don't know which will do better then some sort of asset allocation between multiple asset classes will bring more likelihood of good returns.

Hyperborea

P.S. If you want to know more about this then check out http://www.efficientfrontier.com/ and the book The Intelligent Asset Allocator by William Bernstein.
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