A.I.M. Users Bulletin Board

[ls7550]

If you were to use equal weight ETFs instead of cap weighted ETFs this would at least reduce one's exposure to the components that are unwanted.

Over the years I've noticed that when comparing different portfolio's any differences can more often be attributed to single events/stocks/times.

Whilst some suggest that you have to hold the entire haystack to be sure of holding the best performing stocks I've also noticed that's not true and its more a game of averages, where the best counter balance the worst and more - leaving a surplus profit (broadly).

Whilst being overweight a single stock, sector, country is good if that turns out to have risen at a above average rate, its not so good if the most heavily weighted stock, sector, country turns out to be a relatively poor performer.

Equal weighting helps reduce the risk of a Nikkei post 1990, US/US post 2000 (dot com bubble burst), 2008/9 financial crisis as you're less heavily weighted into the worst stocks/sectors than if you weighted by market cap.

A close alternative to equal weighting is to hold midcaps, as they both feed in/out of the bottom and top. If one stock becomes too big relative to the others then its ejected out into the big/large cap index.

At the top end, the biggest stocks in the largest cap index may have entered that index after strong growth when much of the gains could have already been achieved prior to entering the largest cap index. If you then buy such stocks and they fall back down again at some later date, perhaps after having risen further for a while, then you missed part of the up, caught the down. Midcaps in contrast capture more of the up, eject the stock out of the top, and maybe sometime later see it fall back down into the midcap index at a discounted price.

Midcap is much less inclined to have single stocks heavily weighted and is more equal weighted of sorts. There are differences in the weightings between the largest and smallest however, but in actual percentage terms that's relatively small, perhaps something like the largest being 0.5% weighted and the smallest 0.05% weighted. That's better than having one stock 10% weighted and another 0.5% weighted as can occur in large cap indexes.

Midcaps can clear out dead wood quicker, replacing faltering companies with fresher blood. Large caps can continue to remain large - but just not so large, and take time to heal themselves whilst continuing to remaining in the large cap index (drag).

i.e. midcaps are a reasonable foundation to build upon IMO.