No. of Recommendations: 22
But in practice, they work all to well. The s and p 500 index has beaten our screens, beats almost all newsletters, beats actively managed funds and beats rsp.
VOO has a five star rating due its amazing performance. RSP has a 2 star rating.
Well, that's more a sign that the rating in question isn't very sensible than anything else : )
Contrary to your assertion, RSP has higher returns (It has done better in most rolling 5 year periods, and overall since inception), and considerably lower risk than the S&P 500 through SPY or VOO.
What else do you want comparing two investments? Higher risk and lower returns?
There are two main types of risk in this context.
Remember that risk has nothing to do with short term price volatility--the only *real* risk in any investment is the permanent loss of capital.
In a diversified fund like this, that comes primarily from two sources:
(1) Too much money allocated into something highly overvalued.
On any given day, SPY always has more and more dollars invested in anything overvalued, and fewer and fewer dollars invested in anything undervalued.
That causes a long term drag.
...and/or...
(2) Company specific risk, from whatever cause of unpleasant surprises. The concentration risk is 38 times as high for SPY as for RSP.
On both metrics, RSP is much lower risk than SPY, and (despite the recent small advantage for SPY), the better history of returns from equal weighting show that.
(Also the better returns from almost any weighting other than cap weighting, too, but that's another subject)
The cap-weight S&P certainly won't underperform all the time. There will be many multi-year stretches that it does better, when some very large cap things are doing well.
Sometimes the cap weight is ahead by a big amount--at the most extreme, better by an impressive 9%/year in the 5 years ending in March 2000 during the large cap TMT bubble.
But it's rare.
The odds of equal weight beating cap-weight are about 70% in any given rolling five year stretch since 1935.
The average advantage advantage for equal weight across all rolling 5-year stretches is 2.47%/year, which is quite a bit.
The times that the cap weight does better, like the last five years by about 1.8%, are the exception. To bet on that rare advantage being the rule is presumably to rely on luck to triumph over prudence and data.
And, of course, even it were a tie, the cap weight is far riskier in single-company concentration risk, so there's that.
I don't really see the attraction of SPY, personally. Ignore the star rating.
As an aside, there are firms outside the S%P 500.
Of all the companies in the Value Line 1700 data set:
Equally weighted Jan 1986 - June 2023 inclusive: CAGR 12.0%
S&P 500 same dates: CAGR 10.9%
The gap is smaller than typical because the S&P 500 has just ended on a good stretch : )
Standard deviation of rolling 5 year returns:
S&P 500 7.8%.
Equal weight all VL firms: 5.2%.
S&P 500: Five year returns worse than -1.0%/year in 10% of rolling five year periods.
Equal weight all VL firms: Five year returns worse than +5.5%/year in 10% of rolling five year periods.
Let's hear it for a monkey with a dartboard...weighting equally : )
Jim
