pb4uski
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We all know about the benefits of rebalancing and that it prods you to sell high and buy low. The other day, I was thinking whether this benefit could be used to optimize returns and minimize risk in my domestic equity portfolio (which is currently mostly a domestic total stock index fund).
The idea would be to each year rebalance the S&P 500 sectors to a target allocation. Since the proportions of the S&P 500 sectors are not fixed and vary over time, the targets would probably be based on a 3 or 5 year average of the sectors to the total. Alternatively, the targets could be based on equal weighting of the sectors, which some believe is better than the market cap weighting implicit in the S&P 500 index.
Also, from some of my reading it seems that sectors is an area where some believe that managed funds can consistently better index funds so I think I would use Fidelity sector funds rather than Vanguard’s indexed sector funds.
I backtested the strategy from 2005 to 2012 (because annual return data for the sector funds was readily available) and it seems to be significantly better than just investing in the S&P 500 or the Total Stock Market Index Fund for those years. See table below.
I would probably need to bifurcate my domestic equity allocation (currently ~45% of my AA) to domestic large cap and domestic mid/small cap and would use this strategy for the domestic large cap allocation (which would be about 30% of my total AA) and use the mid and small cap index funds to round out the domestic equity portfolio.
Any thoughts?
The idea would be to each year rebalance the S&P 500 sectors to a target allocation. Since the proportions of the S&P 500 sectors are not fixed and vary over time, the targets would probably be based on a 3 or 5 year average of the sectors to the total. Alternatively, the targets could be based on equal weighting of the sectors, which some believe is better than the market cap weighting implicit in the S&P 500 index.
Also, from some of my reading it seems that sectors is an area where some believe that managed funds can consistently better index funds so I think I would use Fidelity sector funds rather than Vanguard’s indexed sector funds.
I backtested the strategy from 2005 to 2012 (because annual return data for the sector funds was readily available) and it seems to be significantly better than just investing in the S&P 500 or the Total Stock Market Index Fund for those years. See table below.
I would probably need to bifurcate my domestic equity allocation (currently ~45% of my AA) to domestic large cap and domestic mid/small cap and would use this strategy for the domestic large cap allocation (which would be about 30% of my total AA) and use the mid and small cap index funds to round out the domestic equity portfolio.
Any thoughts?
2005-2012 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | Value of 10,000 | |
S&P 500 | 4.2% | 4.9% | 15.8% | 5.5% | -37.0% | 26.6% | 15.1% | 2.1% | 16.0% | 13,915 |
Total Stock Market Index Fund Admiral | 4.8% | 6.1% | 15.6% | 5.6% | -37.0% | 28.8% | 17.3% | 1.1% | 16.4% | 14,501 |
Average Weighting | ||||||||||
Indexed Sector Strategy | 5.6% | 7.3% | 16.2% | 7.3% | -36.6% | 30.7% | 17.7% | 1.3% | 16.6% | 15,418 |
Managed Sector Strategy | 6.6% | 12.3% | 14.6% | 12.4% | -41.5% | 43.9% | 20.5% | -3.9% | 18.5% | 16,706 |
Equal Weighting | ||||||||||
Indexed Sector Strategy | 6.2% | 8.1% | 17.9% | 10.3% | -36.2% | 30.1% | 17.8% | 2.1% | 15.2% | 16,177 |
Managed Sector Strategy | 7.3% | 13.1% | 16.7% | 15.1% | -41.6% | 43.8% | 20.4% | -2.4% | 17.3% | 17,591 |