I think I made a mistake investing in VOO – should I switch to VTI or diversify even further?

Some people invest for many years, only to look at their portfolios and wonder if they made a mistake. This scenario came up in a recent Bogleheads Reddit post. A Redditor is having some regrets about only buying the Vanguard S&P 500 ETF (NYSEARCA:VOO) and is wondering if they should have also diversified into the Vanguard Total Stock Market Index Fund (NYSEARCA:VTI).

The Redditor has significant capital gains on his VOO position, so he can’t sell now. Hey wishes he bought VTI instead to get exposure to international markets, but it’s not as bad as it sounds. That’s how most commenters interpreted the most, but I will share my thoughts as well. You can learn a lot about investing from these types of Reddit posts.

Hold VOO and Buy VXUS for International Exposure

One commenter suggested that the Redditor hold their VOO position and buy some Vanguard Total International Stock Index Fund ETF (NASDAQ:VXUS) shares for international exposure. VTI gives investors exposure to the entire stock market, while VXUS is focused on non-U.S. companies.

This route can speed up the Redditor’s desired diversification efforts without having to sell VOO shares. VXUS has a 0.05% expense ratio and has delivered an annualized 12.5% return over the past five years. VOO has delivered a higher 20.3% annualized return during the same timeframe.

The Redditor Is Already Diversified

It doesn’t seem like the Redditor should panic too much about having bought VOO instead of VTI. Many commenters said that the Redditor didn’t mess up. VOO and VTI have produced similar returns over the years, with VOO slightly outperforming VTI.

VOO has an annualized 12.8% return over the past decade, while VTI has an annualized 12.2% return during the same stretch. Although VTI gives investors exposure to the global stock market, most of its investments are still allocated toward U.S. companies.

These funds have the identical top 10 holdings, but some of them in slightly different orders. Furthermore, VOO allocates 35% of its assets into the top 10 holdings, while VTI pours 30% of its capital into the top 10 assets. The difference between VOO and VTI are so small when it comes to portfolio diversification.

More Diversification Isn’t Always Better

VOO gives investors exposure to 500 companies, while VTI holds more than 3,600 stocks. They are highly diversified, but that’s not necessarily a good thing. It’s possible to over diversify and miss out on the most promising opportunities in the stock market.

For instance, the S&P 100 has outperformed the S&P 500 over the long run. The S&P 100 only holds the top 100 companies, while the S&P 500 holds the top 500 companies. Meanwhile, the S&P 50 has outperformed both of them. Finally, the Roundhill Magnificent Seven ETF (NASDAQ:MAGS) has sailed past all of those benchmarks over the past year. This ETF only holds the Magnificent Seven stocks.

While this isn’t an endorsement to put all of your capital into seven stocks, it shows that diversification for the sake of diversification doesn’t always result in the best returns. The Redditor has done well with their VOO holdings and should be happy with their progress. The Redditor mentioned having a big, unrealized capital gain, and that’s all investors want at the end of the day.

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