No. of Recommendations: 9
The average quality of small listed firms is spectacularly worse than it was in previous eras in many quantitative ways. Higher debt, lower margin, and on and on.
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How can smaller private investors handle this problem? Just buy indexes? Learn to value whole sectors or markets and compare them to each other? Give up??
Well, some thoughts spring to mind
* Ignore what has been conventional advice to look at small caps as the place to outperform on average. They're a nuisance, and if there aren't easily available superior returns, why bother?
* If you don't have the expertise to construct a concentrated portfolio that remains safe, don't do so. These days, I think that includes "don't buy a cap weight index fund".
So I still think that an equally weighted index is probably a good idea. I think QQQE might grow in value faster than RSP, but both are good.
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Once a portfolio is large enough, I'd switch from index funds to individual stocks within an index. It allows you to skip the few stocks that might have issues (dodgy jurisdiction or odious management, perhaps). You skip fees. But most importantly you can get a bit better returns by avoiding the huge drag from index rebalancing.
Random strategy for somebody in saving years. Each month until retirement do the following three steps:
* If you own a stock that has been outside the Nasdaq 100 index set for a full year, sell it.
* If you have more than about 60 stocks, trim back any position that gets over 4% of the portfolio. That's what I would consider the absolute limit for capital allocation to a single firm by someone who doesn't know how to assess single firms. Then:
* Take this month's savings plus any cash in the portfolio from sales or dividends, and put it all into a single randomly selected (NOT hand picked) stock that has been in the Nasdaq 100 for at least a year, that you don't already own. If there aren't any because you own them all, buy more of the one you own the least of.
This will be a rather concentrated portfolio for the first year or two, but only while the portfolio is quite small in absolute terms. Overall, these steps will asymptotically close in on being a no-fees equal weight index, outperforming the "official" index because of the front running of index reconstruction and rebalancing that index tracking entails. That drag is probably over 1% a year.
You could use a different index, but the important bits are random selection, buying candidates in the index for at least a year, and sales of things have fallen out of the index for a full year.
Health warning: Free advice is not guaranteed not to be overpriced.
Jim
