Yes, it’s possible to beat the market, historically. Keep in mind as always that past performance does not guarantee future returns. That said, the factors that allowed an investor to historically beat the market are just simple themes that are likely to be repeated over long periods. And that ‘longer periods’ mention is more than an important consideration. Investment themes can take a decade or more to play out. When I attended a recent Vanguard investor day they stated that they will give the managers of their active funds about 14 years to demonstrate success. Investment themes usually need to move through a market cycle from bull market to bear market and beyond, or at least through modest corrections.
Here’s the ‘suggested’ holdings and weighting for the Greater Growth Portfolio.
This portfolio largely relies on the size premium. That is, smaller companies tend to outperform large cap or mega cap companies over longer periods. Of course the most widely used US index for couch potato investors is the S&P 500. That index is cap weighted, meaning the larger companies by value or capitalization will have the greatest effect or weight in the portfolio. The smaller companies that are perhaps the 400th largest or 500th largest in the S&P 500 will have almost zero effect on the portfolio. There might be a lot of growth potential ‘down there’ toward the middle and bottom of the index.
The index fund, ticker RSP from Guggenheim, tracks an index that equal weights the S&P 500. Each company is .20% of the index. Apple and Microsoft get the same weighting as PVH Corp. and Garmin. What’s more than interesting about investing in the market leading companies that make up a large cap index is that all you have to do is change the weighting strategy to ‘beat the market’. Something tells me that the active managers of mutual funds are trying to hard.
If one is interested in these market beating strategies I’d suggest you follow Ploutos on Seeking Alpha. This author offers a series on 5 Ways To Beat The Market. Here’s a chart with equal weight S&P 500 constituents vs the S&P 500 cap weighted.
We can see that the theme will not work in every period, it requires time to do its thing, and that is usually a move through a market correction. Writers will attribute the alpha to the greater value that is ‘hidden’ in the lesser caps, especially as we approach market tops and more monies are plowed into the most valuable market leaders.
You’ll also find the US mid cap fund IJH in the Greater Growth Portfolio. This is more of a pure play for that size premium. Here’s IJH vs the S&P 500 IVV. Due to fund availability the period is limited to January of 2001 to end of November 2018. The chart is courtesy of portfoliovisualizer.com. The outperformance for the period is 8.8% for the mid caps IJH vs 6.3% for the cap weighed S&P 500 IVV. Certainly the volatility is higher in IJH, but surprisingly the drawdown (decline) in the financial crisis was less in IJH vs IVV.
Portfolio 1 is IJH, Portfolio 2 is IVV.
If one wanted to go down the size ladder (or up in long-term potential returns) they might consider the small cap IJR from iShares. From my research, there is potential for even greater returns over mid caps (longer term) but there is less predictability. I like the sweet spot of mid caps for the size premium.
You’ll also notice the Nasdaq 100 QQQ in the mix. That is a tech and healthcare and bio tech heavy index. Those are very growth oriented, turbo charged sectors. Greater risks, greater returns potential. Here’s QQQ vs IVV from January of 2007 to end of November 2018. Portfolio 1 is QQQ, Portfolio 2 is IVV.
Once again the drawdown in the financial crisis was lesser for IQQ compared to IVV. That may not be surprising as the Nasdaq 100 index excludes financials. This index was very volatile in the 2000-2002 correction as the tech sector melted down considerably more than the broad market. That market correction had its roots in the technology sector. Let’s just say things got out of control with unbridled enthusiasm for nascent new tech companies that were earning little or not profits. It was a sector built largely on too much hope, and the bubble burst, big time. Full disclosure, I was caught in QQQ at the time and paid the price.
That said, today is very different for QQQ compared to 1999 or 2000. Here a few of the names driving the QQQ bus in 2018.
For the Canadian component investors could seek out a small cap or mid cap fund. They might even look to Mawer Investments for an active management approach.
I’ve suggested, at 40% allocation, the iShares High Divided Index Fund IDIV. I’ll leave it to this post on the Tangerine Dividend Portfolio to do the talking. That Tangerine Portfolio tracks those same MSCI High Dividend Yield Indices, creating a globally diversified portfolio. Here’s Canadian Robo Advisors – The Tangerine Big Juicy Dividend Edition. For Canada I like the big profits and wider moats that those big dividends can typically find.
Those MSCI High Dividend Indices have a history of outperforming the broad market parent indices in Canada, US and International.
The Total Greater Growth Portfolio
The outperformance for the US assets (as allocated above) would have netted alpha of about 1.5% annual from 2007 to present. See the Tangerine article and google the MSCI indices for the fund fact sheets to see the historical (out)performance.
Given the US withholding tax consequences on dividends and currency conversion charges you might concentrate your US holdings in RSP accounts and check in on the availability of US dollar accounts with your discount brokerage. The big Canadian dividends will qualify for the Dividend Tax credit in taxable accounts.
Thanks for the read. Please send me a note if you have any questions – firstname.lastname@example.org