Gyroscopic Investing

What do forum members think of using equal-weighted, broad market ETFs--example, RSP--for the equity component of the PP?

I don't like two things about this. Firstly, it is less tax efficient and secondly it takes you farther away from the efficient market hypothesis. EMH is not perfect but it ain't too shabby either.

There has been a lot of archived discussion about effectively slicing/dicing the HB PP stock component, or otherwise deviating from the broad market.  (I have no EMH objection to doing any of that.)  But the way the HB PP has worked over four decades indicates a Total Markets (or just a S&P 500) approach is terrific both from a correlations standpoint and cost.  I see no reason, if using the HB PP, to pay 40bps where I can instead pay 15bps. 

All right, understood, but RSP, to cite one example, IS the S&P500 in a different formula, nothing out of the mainstream, and it's performance is superior. 

longeyes wrote: All right, understood, but RSP, to cite one example, IS the S&P500 in a different formula, nothing out of the mainstream, and it's performance is superior. 

I can almost understand an equal-weighted TSM, whereby you'd also get the Small Cap exposure that has the longer historical evidence for outperformance (but I would not do that either with the HB PP).  But here, all you are gaining, really, is more "midling" exposure for almost triple the price.  Its inception is from 2003, so the "superior performance" is explained by recency.

I'm sure that National Retail Properties, Inc (a small cap holding) is a great company, but they ain't GE in size. I want to hold much more GE and much less of smaller companies in my portfolio. GE is a worldwide global power house and National Retail Properties, Inc. isn't. So why should I hold equal amounts of them if the markets don't?

I'm not saying one should, but cap-weighted indices have well-known liabilities in that you wind up with a top-heavy portfolio and not nearly the broad diversification you seem to have.  I was just throwing it out as a possibility, given that RSP appears to have outperformed SPY and VTI over time, but I will probably go with VTI anyway.

Way back when, I researched RSP and didn't like what I found.  I don't remember now what all that was...  expense ratio, turnover,   It wasn't the equal weighting (that's how I allocate my individual stocks) but it could have been the whole "equal weighting to that turkey?!?" aspect of a broad market equal weighted fund.  Or maybe it was just that every time I look at the S&P 500 I see companies I know, which cover the whole spectrum from "there is no way I want invest in that" to "I expect that one is better than all the rest together."

Does it seem at all ironic to you to first select the 500 largest companies by market cap (bigger is better), and then decide to invest the same amount in each one (the little ones are just as good)?  I think a better equal weight fund would start with a better initial screen, maybe something like "all companies exceeding {some trading volume} (for sufficient liquidity) on the major U.S. exchanges (no pink sheets) with growing profits 3 years of the past 5 (avoid the sinking ships)."

But bottom line I'd rather have more control over how much small-cap exposure I take and equal weighting isn't more control, it's just different.  (Yes, I am a control freak, and yes while sometimes it hurts it usually works well.)

When I initially set up my PP I chose a cheap TSM fund (VTI) for the majority of the stock portion based on bogle and crawlingroad discussion, and supplemented that with more small-cap exposure by using a small-cap fund (currently VBK, small-cap growth) in my typical 2/3 + 1/3 mix.

Now as I do the research or need to lighten the stock portion I sell VTI, and additions to the stock portion go into dividend growth stocks (nearly all large cap) and more VBK.  I do try to keep roughly equal allocation between all the individual stocks and while not rigorous about it, I do consider the 2/3 large + 1/3 small mix.  At least for now. 

The VBK portion and the individual stocks (except EMR) have been doing great so far.  My percentage return in VBK is almost 3x that of my VTI.  VBK does tend to be more volatile (look at historical chart) but here's to hope.  Oh, and my individual stock portion is 2x better than the VBK even after EMR.  And bonus, if what I did breaks the PP then I get to keep whatever pieces are left.

Clive wrote: RSP has a 0.4% expense ratio, however an equal weighted index does have the tendency to be more small cap like for example comparing RSP (Rydex S&P Equal Weight ETF) and IJR (iShares S&P SmallCap 600 ETF)
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and as such is part of the potential above average rewards that Fama/French noted for small cap value stocks since the mid 1920's.

Yup, and remember that "potential above average awards" has a flip side of "potential above average loss."  That's why when I pick individual stocks I stick mostly with large caps.  But when dreaming of small cap rewards, also check VB, VBR, and VBK.  I think small caps are a great fit in the stock portion of the PP.

Oh, and just a tangent off using the DOW in your chart...  The DOW is only 30 stocks.  Look at them and cross out the obvious stinkers that are consistently not making money (GM was in the DOW not too many years ago and it stunk bad).  Cross out any who did not raise their dividend every year of the past 10 (or better yet the past 25).  Invest equally in what's left.  Repeat every year to add positions, but don't sell a position unless they cut dividends, or stop raising divs, or otherwise turn into a stinker.  If that does happen, sell it as soon as you can.  There's your free stock tip of the day, and worth every penny you paid me for it, maybe more.  It's worked for me but you'll likely need more diversification and even then you may lose your entire investment along with your job, your wife might leave with your boss, your best friend might steal your girlfriend just after his dog knocks up your dog, who then runs away.  And it will all be your fault for reading this post.  Send it to at least 5 friends or else.  YMMV, no warranty expressed or implied as this is not suitable for any purpose even to wipe as it is not delivered to you on suitable paper.  Watch out for splinters.