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Asset Allocation Portfolio Strategies Retired Investor

Equal Weighting Across Market-Cap Sizes Beats a Total Market Fund

Over 25 years, the growth of a $10,000 portfolio equally weighted between large, mid-size and small stock funds was more than $3,000 higher than that of a total stock market index fund.

by Craig Israelsen | April 2026

Featured Tickers:
  • Long-term data shows that mid- and small-cap U.S. stocks outperform large caps over 25 years despite recent large-cap dominance
  • Equal allocations to large-, mid- and small-cap funds improved returns, reduced volatility and strengthened retirement portfolio outcomes
  • Broad diversification across multiple asset classes can create a more resilient, balanced investment portfolio

Over the past 25 years (2001–2025), mid-cap and small-cap U.S. stocks have outperformed large-cap U.S. stocks.

This may be surprising to some because of the popularity of the S&P 500 index, which comprises 500 large U.S. stocks. During the past 10 years (2016–2025), large-cap U.S. stocks outperformed mid- and small-cap U.S. stocks by a considerable margin (Table 1).

In the analysis presented here, large-cap U.S. stocks are represented by Vanguard 500 Index Admiral fund (VFIAX), mid-cap U.S. stocks are represented by Vanguard Mid Cap Index Admiral fund (VIMAX) and small-cap U.S. stocks are represented by Vanguard Small Cap Index Admiral fund (VSMAX).

Investors may ask whether asset allocations should be based on longer-term results or more recent performance. I suggest that a longer time frame—in this case, the past 25 years of performance—should be our guide.

Performance over the past 25 years suggests that we should allocate more heavily to mid- and small-cap U.S. stocks, whereas performance over the more recent 10+ years favors large-cap U.S. stocks. What is the right approach? Or should we simply invest in all three market-capitalization vectors of the U.S. stock market? The answer is “yes” to investing in all three market-cap vectors.

Allocations should not be limited to trivial percentages for mid- and small-cap stocks. To produce material results, we need material allocations.

Table 1 A Comparison of Ways to Invest in U.S. Stocks The cap-size fund with the highest return for each year is bolded.

Comparing to a Total Market Fund

Some may ask: Why not use a total stock market index fund, such as Vanguard Total Stock Market Index Admiral fund (VTSAX), instead? Wouldn’t that be a more convenient way to gain exposure to large-, mid- and small-cap U.S. stocks? It is indeed convenient, but it’s suboptimal. Let me show you why.

As you can see in Table 1, Vanguard Total Stock Market Index Admiral had a 25-year average annualized return of 9.00%, which was only slightly better than Vanguard 500 Index Admiral’s 8.79% return over the same period. The asset allocation of Vanguard Total Stock Market Index Admiral is roughly 70% large-cap U.S. stocks, 20% mid-cap U.S. stocks and 10% small-cap U.S. stock. The growth of $10,000 over 25 years was comparable between the two funds. However, the ending value of a retirement portfolio with withdrawals consisting only of Vanguard Total Stock Market Index Admiral was $86,963, versus total depletion in Year 23 for a portfolio consisting only of Vanguard 500 Index Admiral. This is strong evidence that spreading out the allocation to mid- and small-cap stocks is helpful—particularly for retirees.

But now consider the performance of an equally weighted portfolio of Vanguard 500 Index Admiral, Vanguard Mid Cap Index Admiral and Vanguard Small Cap Index Admiral. It had a 25-year average annualized return of 9.18%, which was 18 basis points (bps) higher than Vanguard Total Stock Market Index Admiral. As a bonus, the equal-weight portfolio had 15% lower standard deviation, meaning it incurred less variance in its returns. The growth of $10,000 over 25 years in the equal-weight portfolio was more than $3,000 higher than Vanguard Total Stock Market Index Admiral.

The Equal-Weight Portfolio in Retirement

The retirement portfolio scenario where money is being withdrawn each year is where the equal-weight portfolio truly shone. Starting with a balance of $250,000 on January 1, 2001, this portfolio had an ending balance on December 31, 2025, of $460,155. The ending balance for the same amount invested in Vanguard Total Stock Market Index Admiral was $86,963. Put another way, the equal-weight approach outperformed the total stock market index fund approach by more than $373,000.

Here is the amazing part: The total amount of money withdrawn over the 25-year period was $455,741! The equal-weight portfolio had an ending balance that was greater than the amount withdrawn. In the domestic equity portion of a retirement portfolio, the allocations to mid- and small-cap U.S. stocks should be comparable to the allocation in large-cap U.S. stocks. Very simply, meaningful exposure to mid- and small-cap U.S. stocks is crucial.

Though convenient, a total stock market index—in this example, Vanguard Total Stock Market Index Admiral—fails to achieve meaningful exposure to mid- and small-cap U.S. stocks. The results over the past quarter century reveal the price of that convenience.

This analysis used Vanguard mutual funds to calculate the performance of the various U.S. equity investing approaches. Fidelity funds could have been used as well. For example, Fidelity Total Market Index fund (FSKAX) is analogous to Vanguard Total Stock Market Index Admiral and Fidelity 500 Index fund (FXAIX) is comparable to Vanguard 500 Index Admiral. Additionally, Fidelity Mid Cap Index fund (FSMDX) is comparable to Vanguard Mid Cap Index Admiral, and Fidelity Small Cap Index fund (FSSNX) is very similar to Vanguard Small Cap Index Admiral.

U.S. Stocks in the Context of an Overall Portfolio

The evidence presented thus far suggests that mid- and small-cap U.S. stocks deserve as much attention as large-cap U.S. stocks in the overall asset allocation of an investment portfolio. But what else should be included in a diversified investment portfolio? Figure 1 presents a 12-asset portfolio model of mutual funds or exchange-traded funds (ETFs) that covers many of the important asset classes.

Figure 1 A Blueprint of a Broadly Diversified Portfolio

In this 12-asset portfolio, there are seven broad asset classes, or “silos”: U.S. stocks, non-U.S. stocks, real estate, resources, U.S. bonds, non-U.S. bonds and cash. The U.S. stocks silo is built with three separate funds: one large cap, one mid-cap and one small cap. The non-U.S. stocks silo has two positions: developed non-U.S. stocks and emerging non-U.S. stocks.

Real estate is a single-fund silo where one mutual fund or ETF suffices. Resources is a silo that requires two funds, one focusing on natural resources stocks and another targeting commodities. The U.S. bonds silo also requires two funds, one focusing on U.S. bonds and the other on Treasury inflation-protected securities (TIPS). The non-U.S. bond silo utilizes one fund, as does the cash silo.

Overall, 12 mutual funds or ETFs are employed. The allocation to each of the 12 funds is up to the individual investor, but a reasonable starting point would be to equally weight all 12 funds. By doing so, the overall asset allocation of this model is 66% “growth engine” components (from large U.S. stocks to commodities) and 34% “brakes” (from U.S. bonds to cash).

Using Vanguard mutual funds and ETFs, the 12-asset model produced an average annualized return of 6.90% over the past 25 years. In 2025, the return was 18.92%. If using Fidelity funds, the 25-year return as of December 31, 2025, was 7.38% and the 2025 return was 14.23%.

Comparing this type of investment model to the S&P 500 is not meaningful, as this model represents a holistic, broadly diversified investment portfolio while the S&P 500 is a single asset class with no broad asset class diversification.

Takeaways

The data shows three things investors should consider doing with their portfolios. First, diversify equitably across large-, mid- and small-cap U.S. stocks. Second, diversify even further by holding funds that offer exposure to a wide range of asset classes, or silos. Finally, give the portfolio time to do its job. 

Equal Weighting Across Market-Cap Sizes Beats a Total Market Fund Video

We think you’d like this related webinar! How to Test Retirement Decisions Before You Make Them

Discussion

ANURAG M from CA posted 4 months ago:

Hi, Was there any rebalancing (annual or otherwise) done for this test ? Thank you


JOHN L from NJ posted 4 months ago:

This worked in the past 25 years but will it work in the next 25 years? Probably not as the future is unlikely to be a repeat of the past.


Mahlon M from WA posted 3 months ago:

I guess this is a lot different than Level3 passive investing.


ROBERT A from NC posted 3 months ago:

Wow. I used a spreadsheet and applied the same assumptions to $250,000 invested in VGT for the past 21 years (its inception date was in early 2005). Its ending balance after the withdrawals was $1,635,074.39. The total amount withdrawn over the 21 years was $358,456.07. The current value of $10,000 invested in VGT for those 21 years would be $156,843.57. That looks a lot better to me than the author's 3-fund portfolio. The real question is whether we can rely on the past 20-some years of performance to predict the future 20-some years for these funds.


K W from CA posted 3 months ago:

A single 25 year result is not adequate. What would be the result for the about twenty rolling 25 year results since 1980 ? Why choose 25 years, not 30 years ?


BARRY J from TX posted 3 months ago:

I absolutely love the creative perspectives that Craig assiduously prepares to stimulate AAII members' thinking and learning. Craig takes us through the idea step-by-step, stopping to reinforce WHY these key concepts matter to US along the way. His articles make me think about the importance of focusing on the BIG BASICS – (A) allocation (choosing assets), (D) diversification (mixing the assets selected to increase return and reduce variation), and (P) persistence (fidelity of purpose and steadfast resolve) and (A) attentiveness to ever-changing (volatile) market environments and the (M) roles of the three major statistical "movements" that drive the mix of market behaviors – volatility (price movements), alpha (return trends), beta (total market return trends), and averaging (the power of regression to the mean) while i+++gnoring "noise." ========================================================#1 John L asks THE BIG question: Will something, [theoretically described, but never implemented] that [could have] "worked" [?] in ONE past time period, work in FUTURE time periods with MY REAL MONEY? #2 Every investor organization always states the same UNIVERSAL disclaimer, "Past performance does not guarantee future results." =======================================================#3 Invest in the US first. There is adequate diversification in index funds. Craig only introduces the EX-US and Ex-US fixed-income assets to obtain extreme diversification to address major downturns, but the potential for larger losses and lower performance is significant. #4 Note that Craig's models (all his versions) rely on US market returns to produce MOST of future returns. That's a big clue on how you can reduce future uncertainties: Ex-US markets were not kind during the last 25 years. There are even fewer reasons to expect paranoid world governments and schizophrenic overseas markets with well-documented practical issues (fund fees, forex conversions, etc.), erratic behavior (that is where the use of Ex-US funds to "diversify" 2/3/5/12 asset "silos" he describes), and lower economic promise to prosper more than the US in the future given the "bundle" of uncertainties EVERY FUTURE faces: (1) the overall economy (expected technologies, employment, productivity, and growth), (2) government fiscal policy (budgets, spending, deficits, debt servicing rates), (3) monetary policy (interest rates, access to credit), and (4) uncertain future market ecosystems/environments from 2026-2050 that have a higher probability of higher "sequence risk" of the next 25 years. #4 AAII Investors will have to live 25 years to see promised benefits. That's a lot to ask of AAIIers over age 55. Sequence risk INCREASES after age 55. It will be a little late to consider a "do over." Regards


BOHDAN C from PA posted 3 months ago:

Why was the Vanguard 500 Index depleted. Its returns were better in most of the ten prior years than that of the others. If the average return was 8.70% annually and just 5% was being withdrawn, how was all the money gone......Further, some of this analysis assumes a $250,000 starting amount whereas the other line starts at just $10,000, which makes for a difficult comparison.....The mid cap and small cap indexes had returns of 9.40% and 9.19%, respectively, over a 25-year period, a significant difference of 0.21%/year. Over 25 years, the mid cap index would have returned 845%, while the small index would have returned 801%, a difference of 5.5% (i.e. 44%/820%). Yet the ending values are almost equal, just $81 different over $676,000, a difference of just 0.012%.


DAVID H from IL posted 3 months ago:

Truly an eye-opening article with real usable content and advice for "common-man" independent investors. As for the next 20 years ... get rid of the current administration and never, ever elect failed businessmen who make obvious unrealistic clownish promises based on "exaggerations." His pure incompetence cost me $145,000 and all investors trillions.


MICHAEL S from CA posted 3 months ago:

I enjoy Craig's articles, but most of his assertions are to invest more in small caps (particularly small cap value), and since small caps did really well in the first decade of this century and he uses the 2001-2025 period, the data supports this allocation. However, small caps have seriously lagged in performance compared to large caps (particularly large cap growth) in the last five or six years (as can be seen in the table), and it requires much conviction and patience to maintain this allocation. Also, if you are close to, or entering retirement, it's better to be in large caps to avoid the larger losses of small caps if a recession were to occur (and the associated sequence risk). Also note that RSP outperformed SPY in 2022 due to it's lower concentration of stocks in the SPY, but has lagged since then in the bull market with the exception of the broadening of the overall market late last year.


ROBERT A from NC posted 3 months ago:

It's always amusing to hear the complaints from those who blame others (see Mr. H above) for their own failures. Since I started investing over 45 years ago, I have never lost portfolio value between the inauguration and term-end of ANY president. So far, that trend has continued under the current President. If you lost value on your investments between January 20, 2025 and today, YOU are doing something wrong. If you'd merely put all your money in IVV (an ordinary ETF tracking the S&P500) on the last trading day before the President took office for his current term, you'd have a 14.9% gain at yesterday's market close. And that's NOT even including distributions. SMH


Craig I from UT posted 3 months ago:

The analysis assumes the various portfolios were rebalanced annually. The reason Vanguard 500 was depleted in year 23 is due to the losses in the first 2 years (2001 and 2002). This is a clear example of sequence-of-returns risk when money is being withdrawn from an account. VGT is an excellent fund, but it does not represent a prudent portfolio. Rather, a great ingredient in a portfolio.


DAVID L from UT posted 3 months ago:

I came to comment and after reading the comments, much of what I wanted to say has already been said. I will add a couple of thoughts. The bottom line comparison over 25 years shows 9.18 return for the Three Funds and 9.00 for the Total Market. That minor 0.18 is in the range that I consider "noise." Not enough to be meaningful in choosing investments, but the bold headline would lead one to believe otherwise. The comparison for the most recent ten years does have a significant difference in favor of the Total Market return - 14.24 soundly beats 12.06. The momentum of the last few years is hard to ignore. Another observation - Starting with two years of significant losses puts one in a hole that is difficult to climb out. Let's chop off those first years and see how a more likely scenario plays out for the Ending Value After Withdrawls on other rolling timeframes. (Craig acknowledged this in a comment response.)


RICHARD B from FL posted 2 months ago:

From Figure 1 I am wondering from "A Blueprint of a Broadly Diversified Portfolio" what are the 8 ETF symbols for the asset classes in the 8.33% allocations are of the 66% overall portfolio and also, what are the 4 ETF's symbols for the Fixed-Income 8.33% allocation or 34%. If anyone can provide that for me my email address is richardbudd@bellsouth.net. Thank you.


JOHN P from CO posted 2 months ago:

At first, I found the results to be surprising, but I was able to replicate the findings. I did, however, perform a similar analysis starting in 2010. This time, the Total Stock Market Fund held its own compared with the equal weights of the three funds, and actually had more left at the end of 2025. What, I think, this does clearly show is the importance of sequence-of-return risk, as David L points out and Craig acknowledged.


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