Author Topic: Equal Weighting Strategy?  (Read 3363 times)

dogboyslim

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Equal Weighting Strategy?
« on: February 22, 2017, 04:49:06 PM »
So I started using personal capital and they invited me to consider them as my investment manager.  Generally I'm opposed to this idea, since I'm uncomfortable with active management.  The big sell was that I was over-weighted in certain sectors since I'm using a total market index, and that they would "fix" that for me through the use of stock, and ETF purchases.

I understand the value of diversification, but I'm curious if there are any proponents or nay-sayers related to this topic that would care to support or refute the virtues of this approach over traditional indexing.

I'm still disinclined to use them as my adviser, but that doesn't mean that everything they told me was bunk.  Any thoughts or links to articles that were particularly helpful to you in this regard?

Thanks!

TheAnonOne

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Re: Equal Weighting Strategy?
« Reply #1 on: February 22, 2017, 06:14:06 PM »
Ultimately, like everything in the market it depends on when you do this. Certainly there are periods where this strategy didn't work and others where it did.

I would be interested in seeing some hard numbers to back this up though. I also got the same "Sell" from them and just passed with a firm but polite "No"

Market returns are not even that important in the accumulation phase, your income is 1,000 times stronger.

MustacheAndaHalf

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Re: Equal Weighting Strategy?
« Reply #2 on: February 22, 2017, 08:32:35 PM »
The "equal weight" strategy was mentioned in a book called "The Fundamental Index".  On paper it sounded good.  Looking at the actual RAFI funds, however, reveals that it acts like Vanguard Growth.  The correlation was too close for me to consider the idea interesting.

When you go "equal weight", keep in mind that Apple grows.  When they grow bigger, the fund or company has to sell Apple stock to bring it back to equal weight.  That happens for every stock the fund owns, which motivates them to do it less often - say quarterly.  So it might not keep equal weight as often as you expect.

Also "equal weight" has to involve selling.  So your realized capital gains - on which you pay tax - will be much higher and much shorter term.  It's not a tax efficient way to deal with investing.

You can buy specific ETFs that employ this strategy, with professional management.  I don't see the value in having an unknown person at an investment company do this for you.  But I'm also biased because it doesn't look like equal weighted S&P 500 funds do much differently than S&P 500 Growth - but I haven't looked at it in a number of years, so it could have changed.

CorpRaider

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Re: Equal Weighting Strategy?
« Reply #3 on: February 23, 2017, 07:55:30 AM »
Bogle says its a closet midcap fund (if you're talking EW S&P 500).  Not sure I totally buy that but you can check out the RSP and VO correlations and they are pretty darn close.

Radagast

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Re: Equal Weighting Strategy?
« Reply #4 on: February 23, 2017, 01:55:00 PM »
For equal weight S&P500, here a a backtest showing it vs. cap weighted S&P500, Vanguard Growth Index, and Vanguard Midcap Index. I don't think there is anything wrong with equal weight S&P500, but in practice you could achieve the same thing cheaper with approximately 80% midcap index + 20% S&P500 index.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=02%2F22%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=RSP&allocation1_1=100&symbol2=VIGAX&allocation2_2=100&symbol3=VO&allocation3_3=100

For equal weight sectors, here is a back test comparing all Vanguard sector ETF's equally weighted compared to equal weight S&P500, midcap index, and cap weighted S&P500 index. In an ironic twist of fate, equal weight sectors and equal weight S&P had almost identical returns over this period. As with above I see nothing wrong with equally weighting sectors, but there may be cheaper or simpler ways to get a similar result.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=02%2F22%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=RSP&allocation1_1=100&symbol2=VCR&allocation2_2=9&symbol3=VDC&allocation3_2=9&symbol4=VDE&allocation4_2=9&symbol5=VFH&allocation5_2=9&symbol6=VHT&allocation6_2=9&symbol7=VIS&allocation7_2=9&symbol8=VGT&allocation8_2=9&symbol9=VAW&allocation9_2=9&symbol10=VNQ&allocation10_2=9&symbol11=VOX&allocation11_2=9&symbol12=VPU&allocation12_2=9&symbol13=CASHX&allocation13_2=1&symbol14=VO&allocation14_3=100

RangerOne

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Re: Equal Weighting Strategy?
« Reply #5 on: February 23, 2017, 02:52:54 PM »
Just finished listening to John Bogels common sense investing. Even though it is a little out of date, only speaks up to 2006 so its missing the crash, I think his advise is still sound.

Active managers know a lot about recent trends and they are always trying to sell the next best index or the next best diversification strategy. They probably aren't lying either when they note that their strategy they are selling has beaten the total market for x amount of year. But over the long term, save for the introduction of the first indexes, no new fancy weighting strategy for indexing or special index has been game changing or outperformed total market diversification through traditional indexes.

The simple sound advice remains. Buy and hold a broadly diversified portfolio with Stock and Bonds weighted to your risk preference and time line. Second buy the whole stock market. It isn't sexy, it isn't exciting, and it may even lose in the short term to say buy a Growth or Value index. And those are the reasons why active managers will always be trying peddle new things.

Its possible one day someone will discover something that works better than a traditional total stock market index, but it hasn't happened yet.

At the end of the day your best long term bet is to play it stupid and hold the total US stock market as closely as you can. Then buy a smaller portion of the total international stock market. And cushion it with your Bond index. Until you see investor of the ilk of Warren Buffet and John Bogel come out of the wood work and start writing books about how we have had it all wrong it is probably best to ignore people who suggest you should do something different for a fee with the vast majority of your long term money. You would be setting yourself up to lose in the long term the majority of the time.

If you want to test out an active manager for fun, give them at most 5-10% of your money to invest. But keep the rest in the tried and true funds.

How much do they want to charge you for this sage advice?

Indexer

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Re: Equal Weighting Strategy?
« Reply #6 on: February 26, 2017, 09:22:01 AM »
Quote from: dogboyslim
So I started using personal capital and they invited me to consider them as my investment manager.  Generally I'm opposed to this idea, since I'm uncomfortable with active management.  The big sell was that I was over-weighted in certain sectors since I'm using a total market index, and that they would "fix" that for me through the use of stock, and ETF purchases.

Overweight certain sectors?  No, you aren't, you are weighted the same as the market. What they are telling you to do is to overweight certain sectors!

There have been plenty of comments on equal weighting so far. There are pros and cons. The cheaper way of accomplishing basically the same thing would be to overweight mid-small caps. This can improve long term returns, there is no guarantee on that, but it will also most likely increase volatility.

protostache

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Re: Equal Weighting Strategy?
« Reply #7 on: February 26, 2017, 11:01:00 AM »
My self-directed 401(k) account is currently invested in 27 individual stocks across seven sectors. Almost 50% is consumer defensive (think Nestlé, Unilever, Clorox, beverage conglomerates, etc). I attempt to keep the portfolio at equal weight on cost basis. Every month when my contributions go in I sort by lowest cost basis and then by highest earnings yield, making one trade. I've only sold once so far, to rebalance one particular energy position down to average cost basis.

My investing thesis is that I want this particular section of our family portfolio completely out of Silicon Valley technology firms. My ongoing employment is highly dependent on these firms continuing to exist and make lots of money, and VTSAX has many of these large firms at the top of their allocation. I believe this equal weight allocation will be more recession resistant while providing similar day-to-day, month-to-month performance as the S&P 500.

The rest of our family portfolio (this account makes up about 50%) is almost entirely in VTSAX and VTIAX.