Hi Dan,
Re: Equal Weight vs Cap Weight.................
Cap weight concentrates our share dollars in the large end of the cap markets and has less "Dollar Diversification" than does equal weight. A cap weighted ETF might have 40% to 50% of the total dollars of investing in just 4 or 5 companies with the smaller caps representing the remainder. Compare that to "Equal Weight" ETFs that might have 10 or more holdings adding up to roughly 30% of the invested dollars per share and you see the difference.
Another thing is whether your portfolio is then Sector weighted equally or an attempt to match the S&P 500 sector weights. (those sector weights vary with time) One can choose equal sector weights and let AIM decide over time as to what sectors are heaviest. I did that initially and then when we had a real big bear market, I'd "rebalance" back to nearly equal dollars per sector. I'm still not sure that's the best idea. The DOTCom Bubble is an example of why this needs to be considered. AIM would have sold mountains of the tech stocks heading into that bubble peak while only modestly selling other sectors. When the bubble started to deflate, the tech sector would suck up a lot of the total cash while repurchasing shares. Would those dollars been better being spent more broadly around the other sectors? What was the portfolio overall risk after 10 years of AIMing heading into 2000? Was it too heavy in Tech or would AIM and its massive cash have moderated that risk?
Re: Rebalancing Systems......................
The problem with rebalancing systems is they can be counter productive during long bullish or bearish periods. Let's assume equal weights per sector to start. The Bull market comes along and all ships rise. However, not all ships are rising at the same pace. So, near the top of the market we have one sector up nearly 50% and another up just 20%. So, do we take $$$ from the one that's up the most and buy more of another sector that's also "up" at that time? What if AIM's telling you to finally sell some of the sector that's now up just 20% after a quiet spell. Rebalancing wants you to buy and AIM wants you to sell.......
AIM's better at the allocation of funds than rebalancing. Maybe just a rebalance once in a while at near market lows or highs might work but I'd want to study it more before venturing an opinion.
I guess the same situation can occur with reconstituting a portfolio back to the S&P 500's sector weights on a periodic basis. You could again have some sectors adding just when AIM is suggesting selling and visa versa.
Just some food for thought,
OAG Tom
Buy from the Scared; Sell to the Greedy.....
AI
