Right, because the 500 biggest companies are such a large fraction of the U.S. market that the rest doesn't matter even if the index theoretically covers them. The thinking behind small cap exposure would be:Michael wrote:For US equities? I don't think so. Although I prefer total stock market indexes (includes small cap), the performance differences between US total stock market and the S&P 500 index funds are almost identical.Arthur Dent wrote: You should do a post on whether weighting up small caps makes sense.
-Historically they've had higher returns
-These higher returns may make sense as a risk premium
-Similar to the logic behind selecting a higher equity to fixed income ratio when young, over the longest time horizons, it makes to sense to accept higher risk as a trade-off for higher mean expected returns.
But I don't know whether, in reality, this model is an accurate description of small caps in the current environment.
I'm not sure I understand. Earnings should be earnings whether or not they are paid out as dividends. You can even pay a dividend when you're not currently making a profit. Seems to me dividends or no dividends, to first order, is only a tax concern and largely irrelevant in a tax sheltered retirement accounts. All returns should be computed as total returns with dividends included.Michael wrote:It's worth noting, technically CAPE should be higher than other times because companies don't pay dividends like they used to.
Actually that point always bothers me because comparisons very often show price return only. For example, your first figure seems to compare a total return international index to the price of the S&P 500, which isn't really valid. Even today when dividends aren't nearly the thing they once were, they are still a significant fraction of total investment returns.