Investing in Total Markets

[wabmester]

Quote:

Originally Posted by d "bigger serving" dollar-wise

Yeah, unfortunately, when I buy my groceries they want dollars, not shares.* And dollars are how we allocate our investments.

So, what are the alternatives for a passive investor?

1) Equal-weighting instead of cap-weighting.* *Historically, equal weighting has done better, but it flys in the face of EMH.

2) Slice and dice.

3) Tilt towards value and/or small.* * That's basically what I do.* *Buy the Total Market knowing that you're going to get a heavy allocation of both large-caps and dumb-caps, but try to counter by adding a side-dish of value and small.

[d]

equal weighting would have the benefit of underweighting overpriced and overweighting the underpriced ... but would not appropriately weight (otherwise appropriately priced) large vs small companies.

don't believe either slice 'n dice or small or value would solve the problem, as you necessarily overpay for (and hence relatively overweight) anything that the market has overvalued, and underpay* for (and hence relatively underweight) anything that the market has undervalued ... and there are plenty of overvalued "value" stocks out there!

since we buy at market prices, we're likely going to pay too much for something* * *

[Nords]

Quote:

Originally Posted by Texas Proud It would be interesting to see if there is someone who consistently beats the market on a risk adjusted basis..* and I am not talking a specialty fund such as energy or gold who is doing it now.. but over a very long period..

Bill Miller & the Danaher brothers are just getting to the statistical point where they can claim to be separating skill from dumb luck & dartboards. And they've chosen to compete against the S&P500, which may not be the right benchmark for their investments.

Otherwise I think the best record goes to Buffett. He's not very impressed with beating the S&P500, either, and stocks make up a much smaller portion of Berkshire Hathaway than they used to.

[lazyday]

Quote:

Originally Posted by wab 1) Equal-weighting instead of cap-weighting.

BRLIX!

You left out #4: Become a Fundie.
RAFI is expensive today for the individual investor, but there's a pension? fund which might (or already has) put over a billion in it, most likely for much cheaper than the Powershares ETF.

In W. Berstein's latest website update, he says the historical outperformance after accounting for size,value,market loading isn't statistically significant, so the jury is still out on RAFI even if it were free to use it.

Quote:

Originally Posted by d and there are plenty of overvalued "value" stocks out there!

I agree, and don't like the value indexes today. Maybe something like DODGX could be ok, but lately I'm liking the idea of stockpicking. Or stockpickstealing (stockpickerpicking?) where you pick a manager you agree with and use some of their stock picks, with the help of EDGAR or other websites.

[lazyday]

Quote:

Originally Posted by wab I said that all overvalued stocks have a larger cap than they deserve -- by definition. Which means you're getting a *relatively* bigger serving of them than they deserve when you buy a cap-weighted index. ....[snip] So, cap-weighting gives you both more exposure to large caps (which EMH says is OK) and more exposure to dumb caps (which EMH doesn't want you to know).

I agree with the above, but don't have a practical solution that I'd reccomend to others, with today's investment choices.
In fact, if I were to construct myself a brand new portfolio today, with no tax or transaction cost penalties, I'd probably just use VTI and VGHCX for the U.S. portion.

Or, just maybe, instead of VTI, I'd look into combining BRLIX with a little of the VG S&P completion index. If the S&P500 suffers from front running, then wouldn't the completion index benefit from it?

[wabmester]

Quote:

Originally Posted by lazyday BRLIX!

There is an equal-weighted S&P 500 ETF: RSP.

I just googled a Scott Burns article about this subject.* * Excerpt:

The limitation of an equal-weighted index fund, Mr. Arnott points out, is that it's a lot more difficult to buy or sell the smallest stock in the index than the largest stock. Basically, it's difficult to scale-up an equal-weighted index fund. In addition, transaction costs are likely to be much larger.

Mr. Arnott proposes what he calls "fundamental" or "Main Street" indexation. Rather than sorting stocks by market capitalization -- a favorite Wall Street measure -- he proposes building portfolios based on fundamental measures: book value, trailing five-year average operating income, trailing five-year average revenue, trailing five-year average sales, trailing five-year average gross dividend or total employment. In addition, he constructed a composite portfolio combining several of these measures.

The result?

Over the 42-year period from 1962 to 2003, the S&P 500 index returned 10.52 percent annually. A capitalization-weighted index of 1,000 stocks returned slightly less, 10.30 percent. But the Main Street-indexed portfolios returned an average of 12.43 percent. Main Street indexing, in other words, beat capitalization-weighted indexing of the same stocks by an average of 2.13 percent annually while beating the S&P 500 index by 1.91 percent annually.

What causes the difference?

Mr. Arnott believes that capitalization-weighted indexes systematically overexpose stocks that are overvalued while underexposing stocks that are undervalued. An equal-weighted index, like the Rydex ETF mentioned earlier, overcomes this systematic performance drag by eliminating capitalization weighting. Using any of the Main Street index-building tools, however, overcomes the systematic performance drag while allowing the construction of more liquid portfolios.


Article

[lazyday]

Until I see some good analysis or data, I don't trust Rydex to have low internal transaction costs. Bid/ask spread, market impact, and commissions including soft dollars which they pay, according to Swensen.
Also, there's a 12b1 fee which isn't active now, but could kick in.

Bridgeway is willing to have some tracking error in order to minimize internal costs with BRLIX, and since it's only megacap, the stocks are extremely liquid with low spreads. The ER is also only .15%. And, today I think megacaps are relatively cheap.

We've debated Rydex, Powershares, and RAFI some over at Raddr's board, over the last several months. I've been one of the skeptics.
Though I do like the concepts of fundamental, and to a lesser extent, equal, weighting. If executed well, and with low ER.

[cute fuzzy bunny]

You can also go the cheap and dirty route I use.

Target retirement 2045 in the taxable (much of which is TSM), with a huge chunk of large cap value (windsor II) in the taxable

TSM and a large chunk of small cap value in the IRA. Dividends from the TSM in this acct are reinvested in the small cap value.

The benefits of indexed broad markets, with a value tilt.