No. of Recommendations: 5
Re: r.sp, 'This approach tilts the portfolio toward mid-cap stocks and requires high turnover compared with market-cap weighting, increasing transaction costs and adding to its volatility.' Compared to the s and p, it has trailed it over the last 1, 3, 5, 10 and 15 year periods.
Beware the endpoint effect.
The supergiants have clearly just had one of their relatively rare great runs. Most alternatives look bad by comparison lately.
The great majority of folks who haven't been heavily invested in the top few has done quite badly lately, whether in a broad fund, a quant strategy, or a set of hand picked stocks.
This era is much like the late 1990s in that respect, except the biggies are (mostly) much more profitable these days and so not as undeserving as last time around.
Everything else other than "cap weight, all long, all the time" looks like a waste of time...lately. But this too shall pass.
But the operative word here is "rare"--the gigacaps pulling away by a lot is not the usual situation. Nature abhors a vacuum, and markets abhor a get-rich-quick scheme.
The very largest firms are not only not outperformers over the long run, but statistically they are underperformers relative to the dart board.
This shows up over time:
The equal weight RSP has beat SPY overall since inception, and in most of the 3-, 4-, 5-year rolling years since then, more or less what you'd expect over longer time frames.
I continue to observe and predict that avoiding cap weight is likely to get you maybe an extra percent a year over the long run.
I think there are simple ways to tilt the field a bit further in your favour than equal weight to eke out yet another an extra percent with no great effort.
Beyond that it gets very hard to pull off market outperformance reliably.
For example, an equally weighted portfolio of the 200 stocks with the highest ROE in the VL set, monthly after friction, has outperformed SPY in about 60% of rolling year periods since 1986, including (pretty impressively) over the last five year interval.
Overall advantage 3.5%/year, including by about (extremely lucky) 5.2% in the 12 months to June.
I suspect that a very low risk way to get a few extra basis points relative to RSP would be to buy all the same firms, but lag all index changes by (say) a year.
The general rule is that new additions do very poorly in their first period in the index, and index deletions outperform nicely for a while.
Obviously excluding the obvious buyouts and bankruptcies among the index deletions, which you couldn't hold onto even if you wanted to.
Jim
