I see your point (I think..?), namely that diversification precludes potential disaster in one lousy asset... and garners some of the gains, if one particular asset skyrockets. This is of course true. But your list is strongly tilted away from market cap-weight. Equal weight between small-cap, mid-cap and large-cap would be an extreme bias against size. That might be a rational reaction to "factor" literature 30 years ago, but it's a bit risky, no?Assume we started 2014 with initial equal weights into each of those assets, each asset accumulating its total returns, left as-is. From a initial 9% weight in Large Cap that would have risen to being 16.6%. Commodity would have declined from 9% weight to 4.4% weight. Small Cap would have risen to 12.3% weight .... etc.
End of 2023 weights for buy and hold initial equal weights in January 2014
Large Cap16.64%
Mid Cap12.80%
Small Cap12.34%
REIT11.04%
EW8.81%
Intl Stock8.16%
TIPS6.79%
EM6.46%
Bonds6.46%
Cash6.03%
Comdty4.46%
Collectively produced a 5.3% annualized reward. ...
With the former "market cap" (buy and hold) you increase exposure to some assets, reduce exposure to others, according to how they've performed in the past. In effect a momentum play. With equal weighting you repeatedly equalize the exposure, neutralize tilt/bias. Potentially what has been the best in the past will not continue to be the best, similarly what was the worst likely wont continue to be the worst, the quilt will look different. It's entirely reasonable for a position of where Large Cap had risen to be higher weighted to look to reduce that exposure, increase exposure to other assets that had become relatively lightly weighted.
There's a glass half-full vs. half-empty. I don't dispute your numbers, but beholding them, cringe and cry, at how large-caps have been so dominant. If only, if only, I'd had a larger stake in large-caps!!! That would have been my reaction. Glass half-empty. Not joy that I saved myself from the sinking ship of commodities or cash (glass half full).
To your other point (I think...?), if we do NOT rebalance, we put faith in market-momentum. As the crummy asset-classes perennially underperform, their relative weighting falls. This is what happened with US vs. ex-US in my portfolio. Initially I was all agog and eager, with a significant portion of ex-US... but didn't rebalance. As ex-US sat on the front porch sipping lemonade, while US stocks did the heavy lifting, and I never rebalanced, benefiting my portfolio. Rebalancing would have meant selling winners to buy losers, year after dogged year. Because I believe that the future will, in fact, much resemble the past... I continue to eschew rebalancing. But somebody who thinks that the first shall now be the last, that yin will become yang, and so on, would be wise to rebalance. Good luck to them!
Statistics: Posted by unwitting_gulag — Wed Jul 24, 2024 12:03 pm — Replies 85 — Views 6695