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My employer supplies us with access to Financial Engines through our retirement site.

Every once in awhile I rerun the retirement allocation advice and every time it recommends we take all monies out of our Small Cap funds and redistribute into Vanguard Total Market and the Large Cap funds.

I realize that Small Cap are riskier, however, I do specifically tell it we want to stay agressive and we have almost 50% of our money in small caps right now. While I might expect it to tell us to remove some, I find it interesting that it ALWAYS says move it all. I'm contrasting this with alot of the stuff I read on Fool that many here think the small caps will be the way to go for the foreseeable future.

Needless to say, I haven't followed its advice. Right now, we're sitting at 88% chance of having the income I'm shooting for and their allocation doesn't improve on that but does reduce the downside by a couple of thousand.

Anyone else who uses this have this happen or know why the prejudice against small caps?

3MM
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Anyone else who uses this have this happen or know why the prejudice against small caps?

3MM


The only negative I know anoput the small caps is that successful small caps become medium caps and so exit the pool. This leaves the less successful. Of course, some of those go out of business and are replaced by other (we hope more successful) companies.

cliff
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>> Anyone else who uses this have this happen or know why the prejudice against small caps? <<

I don't know. I think the logic is that since large caps are 90% of the U.S. dollar-weighted stock market, you should hold far more large cap than small cap.

But for a younger investor who can take more volatility for higher return, that's hogwash. Having small caps over 30-40 years isn't significantly riskier, returns more, and when overweighted in an asset allocation plan, it increases return AND reduces volatility.

I hold almost as much small cap as large cap. Still, small caps have strongly outperformed in the last four years or so, so the big boys are overdue for a relative comeback. Still, that doesn't cause me to change my allocation.

#29
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If you need that kind of hand holding you should not be investing in small caps. Best bet is a broad market index fund.
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bogwan:

If you need that kind of hand holding you should not be investing in small caps.

Not sure what this is in reference to.

As I said, I don't take Financial Engines' advice. I just check out their asset allocation recommendations from time to time.

I have no intention of limiting our investments to just the total market fund with an 8% return over the last 10 years or so.

thanks anyway

3MM
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Put up a chart of IWM, IWN, IWO, SPY, and QQQQ. Over the last 3 years the small caps are at the top.

So no reason to be apologetic with respect to having small caps.

Of course, all my market timing signals say to sell, so for the immediate future cash is king. No point in buying into a declining market, no matter what the cap.
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"If you need that kind of hand holding you should not be investing in small caps.

Not sure what this is in reference to."

I was not speaking of anyone in particular. I think that people who are just starting should stear clear of anything except a broad market index. Your employer probably is targeting people with very little experience and little time to learn.
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I was not speaking of anyone in particular.

My apologies - that's the problem with message boards. :)

Your employer probably is targeting people with very little experience and little time to learn.

I would agree. I think the access to Financial Engines is an attempt to help these people out. Wasn't the issue of what kind of assistance for allocation, reasonable investments, etc. employers offer their employees one of the issues blasted across the headlines in the wake of Enron?

3MM
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Bogwan,

BTW, do you believe that Financial Engines lets the employers who pay their fee influence their investment advice?

I would find that pretty scary. I guess I assumed that FE just came up with this using the Monte Carlo method it employs. Does anyone know if the Monte Carlo model ALWAYS recommends broad market index investments?

thanks
3MM
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I think FE is purchased with an understanding that they will not give controversial advice, or do anything that might get the employer in trouble. It is likely all run through legal first. If I was an employer I would not suggest employees invest in the things I do.
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