No. of Recommendations: 9
Since '03? Firstly, how many investors bought RSP right when it first launched in April 2003? Most investors wait until an ETF has at least a full 3-year performance history before buying. I know I would. So a first buy in 2007 is far more realistic. Let's see how that investor did. Well, I owned it in 2003. It wasn't exactly a secret : )
The below results will come as a shock to most of you, so let me break the news to you gently. The RSP investor actually suffered a greater drawdown and greater volatility compared to the SPY investor. And for what? For a lower annualized return of 8.7% compared to 9.2% for the market index. Well, we'll happily ignore the cherry picking of a time range--both start and end no less!--that supports your dislike of the security while by choosing a segment avoiding both the long run and shorter interval outperformance.
More to the point: Short term price volatility isn't a meaningful metric of investment risk, and never has been. It's easy to calculate, so that's why academics and fund salesmen use it. Just ignore it.
About the same comment for short term drawdowns, just one other way to measure short term price volatility: the important thing isn't the drop, but whether or not it comes all the way back. Overvalued stuff doesn't, and cap weighted indexes are always overweight the overvalued.
Rather, permanent loss of capital is almost the only risk in security investment. If you buy big blocks of something you don't know how to value or haven't bothered to value, you are taking on a big and unnecessary risk of permanent loss of capital. To demonstrate that this is a real advantage, RSP has outperformed SPY overall AND in most sub-periods since inception. It doesn't take on big bets, so it never takes big losses from individual securities. Avoiding even a few a few biggish losses does wonders for a portfolio.
(The only other risk in investing is the risk of having a whole-history rate of return that is lower than what you truly require to meet the mandate of the portfolio. If you need a real 6%/year over your investing career to avoid eating dog food in retirement, the possibility that you might have a return of only 5%/year is a real risk).
So, the two main goals of a diversified portfolio are to minimize low single-security concentration risk, and to maximize very long run returns. The equal weight index is the winner over the cap-weight index on both fronts, so RSP isn't too bad as a one-ticker portfolio.
You can probably do a hair better if you buy the individual securities yourself, but that's a lot more typing. Two obvious small improvements are to follow changes in S&P 500 index membership only a year after they are announced*, and if you like, skip some fraction of the companies with the lowest ROE. **
Jim
* for example see
https://www.researchaffiliates.com/publications/ar..."As a result, in the first six months following the rebalance, the additions tend to lag the deletions by 14%, and by month 12, the additions lag by 20%."** over the last 20 years, an equally weighted portfolio of the 100 stocks within the S&P 500 with the highest ROE beat the 100 with the lowest ROE by 2.7%/year. One could simply skip buying the lowest 100 by ROE, and/or double up on the best 100.
