No. of Recommendations: 11
These studies showed that a "monkey with a dartboard" can outperform the S&P500 in the short term. The same studies have shown that it does NOT apply over the long term (let's say 2 or 3 decades).
Sure they do. Just not by much.
Here is a super simple strategy to demonstrate, about four decades:
Buy everything in the Value Line database of 1700 stocks, equal dollar amounts. Hold for a year and repeat. If anything is bought out, just hold cash till the end of the year. If anything is delisted, sell it at the first pink sheets trade price and hold cash the rest of the year. Allowing 0.4% round trip trading costs, that beat the S&P 500 total return by 0.64%/year over the last 39 years. (0.4% is a bit low for the early years but reasonable to generous after that)
Of course, the cap weight index has really been on a tear just lately, so today is a particularly lucky endpoint for the S&P side of the test. The same scheme showed the equal weight annual approach with an advantage of 1.17%/year as recently as two years ago (i.e., 1986-2022 inclusive).
A monkey with a dartboard will have the same average return as the strategy mentioned, plus or minus random statistical noise each year depending on the number of stocks chosen. The figure will be a little different depending on the underlying index "universe" you choose, but not wildly so.
There are many possible weightings for a broad portfolio of medium-to-large cap equities. Only one seems to be a bit of an outlier: cap weight seems to be quite a lot worse than almost every other choice, even some choices that are nonsensical. Remember that cap weight index funds were designed to be low work (minimized trading events), not designed to be high return.
Jim
