No. of Recommendations: 8
Some random thoughts
- Holding all of the underlying positions also creates a lot of extra work relating to completing tax returns if you rebalance regularly. I would prefer to avoid this.True, though there is no particular reason you have to rebalance as often as the ETF does (quarterly).
And you might consider some of the offsetting advantages of roll-your-own. I can think of two offhand:
* You might want to skip a few names. For example, last I checked the Nasdaq 100 had 3-8 Chinese firms, which might be of concern for accounting or geopolitical reasons. If there is a firm you consider odious for any reason, you just don't buy it.
* Using a delayed list of index constituents is usually a sure-fire way to beat the index in question. Don't buy new ones right away, don't sell exiting names right away.
This is worth a read, though it is speaking mainly of the S&P 500:
https://www.researchaffiliates.com/publications/ar...My concern is that there is no factor for how much you pay as in price to any measure of present or future value. This could lead one to buy great businesses that are experiencing a bubble. The normal measures to account for this are:
- shorter holds to get out of such positions faster.
- more positions.One might also take the view that you're basically considering an index alternative. The general concept of being an index-type investor is that you just do the same thing for a very long period, through thick and thin, and eventually do just fine. Bogleheads don't get fancy. Thus, if you're doing pretty well on average over 20+ years, it doesn't really matter all that much that there are some down years. On the surface it seems that this view might be leaving a lot of money on the table, but you have to factor in the near certainty that whatever timing you use is going to fail either a large part of the time, or all of the time, and perhaps overall. The 100% sure way to avoid that is not to do the timing.
That being said, personally I would probably start such a scheme only during the next panic. Like streetcars, there's always another one coming. Omens and valuation levels are not reliable, but my goodness things look statistically dire at the moment. As far as I can tell, it is 100% certain that today's average price for Nasdaq 100 firms is not the lowest price that will ever exist in future. So, that would amount to a one-time dip into the shark infested waters of trying to price the market : )
Anyway, I would be interested to hear ideas. Is there anything closer to what I am looking for than:
- Start with Nasdaq 100.
- Top 25 by ROE
Then either:
- rebalance / trade every few years or
- only rebalance / trade based on some timing signal - i.e. exit on a sell signal and re-run the screen before reentering.I've seen worse! (of course, I would say that). Though as mentioned I would actually recommend skipping the timing overlay, other than choosing your moment to start the plan.
You could go with more than 25, maybe 40-50, which would reduce company specific risk and the risk that the high ROE group turns out to be a bad idea for some unpleasant length of time.
I would suggest this elaboration: at your rebalance, sell anything that has been out of the index for at least 6-12 months, and buy some of anything that now qualifies for your "top N" and has been in the index for at least 6-12 months.
Jim
