Comments on: Passive indexing revisited http://blog.canadianbusiness.com/passive-indexing-revisited/ Fri, 20 Nov 2009 07:52:10 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Larry MacDonald http://blog.canadianbusiness.com/passive-indexing-revisited/comment-page-1/#comment-3620 Larry MacDonald Mon, 12 Jan 2009 17:48:04 +0000 http://blog.canadianbusiness.com/?p=531#comment-3620 Meander, Patrick As you say, the performance may be different depending on the time period (I think Mr. Yates just intended his example as an illustration, not a proof). But something not dependent on the time period, I believe, is the risk reduction one can achieve by rebalancing the relative weights of the sector ETFs. If one sector grows to a large weight, then one’s portfolio gets riskier. Rebalancing at the sector level controls this drift. It adds some additional rebalancing cost -- which some investors may prefer to avoid while other, more risk-adverse, investors may deem acceptable (as opposed to owning the broad market and being exposed to the volatility that can result from changes in sector relative weights). I personally am intrigued by the idea of indexing to non-cyclical sectors (which can likely be done with little or no rebalancing). Warren Buffett Steven Jarislowsky, and other seasoned long-term investors seem to have a preference for companies from these sectors. They should be a smoother ride and there is less interruption in the compounding effect. It may or may not be better than indexing to the broader market in the end but it’s easier on the nerves. Meander, Patrick
As you say, the performance may be different depending on the time period (I think Mr. Yates just intended his example as an illustration, not a proof). But something not dependent on the time period, I believe, is the risk reduction one can achieve by rebalancing the relative weights of the sector ETFs. If one sector grows to a large weight, then one’s portfolio gets riskier. Rebalancing at the sector level controls this drift. It adds some additional rebalancing cost — which some investors may prefer to avoid while other, more risk-adverse, investors may deem acceptable (as opposed to owning the broad market and being exposed to the volatility that can result from changes in sector relative weights).

I personally am intrigued by the idea of indexing to non-cyclical sectors (which can likely be done with little or no rebalancing). Warren Buffett Steven Jarislowsky, and other seasoned long-term investors seem to have a preference for companies from these sectors. They should be a smoother ride and there is less interruption in the compounding effect. It may or may not be better than indexing to the broader market in the end but it’s easier on the nerves.

]]> By: Patrick http://blog.canadianbusiness.com/passive-indexing-revisited/comment-page-1/#comment-3616 Patrick Mon, 12 Jan 2009 16:31:26 +0000 http://blog.canadianbusiness.com/?p=531#comment-3616 Agreed with Meander. I'd rather see some reasoning beyond back-testing the strategy over such a small window -- especially one that is dominated by the dot-com bubble and finishes with a once-in-a-century market crash. Agreed with Meander. I’d rather see some reasoning beyond back-testing the strategy over such a small window — especially one that is dominated by the dot-com bubble and finishes with a once-in-a-century market crash.

]]> By: Meander http://blog.canadianbusiness.com/passive-indexing-revisited/comment-page-1/#comment-3560 Meander Sat, 10 Jan 2009 03:57:21 +0000 http://blog.canadianbusiness.com/?p=531#comment-3560 "The results show that it’s better to build [your own indexed portfolio] than to buy [an off-the -shelf package]" Really? It looks more to like the results say that with the benefit of hindsight you can put together a portfolio to do just about anything you'd like it to do. That a particular strategy worked will over the course of 7 years is no basis for saying X is better than Y. It's a basis for saying X worked better than Y for a specific interval of history. The strategy is guaranteed to do one thing over the next 7 years: Cost you trading fees. It may or may not outperform buying the SPY and holding. It may be more volatile and it may be less volatile. It will cost more to manage. “The results show that it’s better to build [your own indexed portfolio] than to buy [an off-the -shelf package]”

Really? It looks more to like the results say that with the benefit of hindsight you can put together a portfolio to do just about anything you’d like it to do. That a particular strategy worked will over the course of 7 years is no basis for saying X is better than Y. It’s a basis for saying X worked better than Y for a specific interval of history.

The strategy is guaranteed to do one thing over the next 7 years: Cost you trading fees. It may or may not outperform buying the SPY and holding. It may be more volatile and it may be less volatile. It will cost more to manage.

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