2020 - Ultimate portfolio

Ok, guys think about this…
Why would you buy an index ETF with an average return, when you can buy the “drivers” of the ETF’s performance and increase your returns.
Yes I know… “diversification” but, look at the table below: I made a calculation on returns simulating 2 scenarions

  • portfolio 1) I buy VTI
  • portfolio 2) Buy the top 5 stocks in VTI and rebalance every year (it could be every 6 months)

Look at the returns below.

Yeah… you may think that works only in the bull side but not only, I simulated the same in the worst scenarios, example 2008, and at the end, you lose more by having the complete Index

What are the risks?
The risk would be that one of the top 5 goes bankrupt… really? I would say that the probabilities are very small.


So, I’m thinking about this "strategy… sure I need to play a bit more with the % per stock


Update 1 :.… I have simulated from 2006 to 2010.
The data I have from the weighted S&P500 for this period is the composition at the beginning of the year so, the simulation is rebalancing your portfolio in January and run the numbers 'till next January (end), check out the results from 2008…

Update 2
I have simulated from 1999 to 2013 (that’s 15 years)

  1. The yearly performance of the portfolio nos is calculated from 1st of January to 31st December.
  2. I have included not only VTI but SPY as well since the “top 5” are the top 5 stocks on market cap for the S&P500.
  3. Numbers in red indicate the outperfomrer
  4. I have made a simulation of compounding the gains from year 1 to 15. The Top 5 final capital is 6.9 times more than the SPY ETF (which is only 2.1)


Backtest it for the last 100 years.

This will never work. Just compare the top15 companies over the last decades:


Interesting thought. In my opinion this might actually work performance wise. What do you mean with top stock. Is it the company size or current performance % or something else?

It is still stock picking by a ranking method and might actually work nicely. Would do it with parts of your portfolio and see how it goes compare to the performance of the VTI.

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Your expected return with the biggest 5 will be lower than the whole market. You will mainly invest in large growth stocks. Growth and large size are both factors with a smaller than average return. The lack of diversification just means that you will take on some uncompensated risk.


I think the excess returns here are largely due to overexposure to momentum factor, driven by dominance of these stocks in the indexes.

Bankrupt, most likely no. But a large drop in stock price due to some company events could be likely. For example take PM - at some point price dropped almost half from 120 to 66 at the lowest point over the worries about its products future. If you had invested 20% of your portfolio in it, this event would mean -10% loss, just from this one stock. The point of diversification is to shield you from such idiosyncratic risks associated with individual stocks, instead taking on only the undiversifiable market risk.

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But you’re missing the point. You re-adjust the portfolio every year (maybe every 6m) this is not a buy and hold, that, I agree wouldn’t work :slight_smile:

Looking to the data 2014 till today it proved to be better. I have run the numbers for bear years and still it’s better (you lose less)… I’ll try to get more data on the top 5 for not years so I can back test more years

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Well, data says something different… the top 5 perform better than the whole index

Are Apple, Microsoft, ExxonMobil & Johnson&Johnson really growth stocks, or rather value? I’d say they have a well established portfolio of products and a healthy net income. I think I would only classify Amazon as growth.

I read an interesting article today (but in Polish), where the author argues, that growth stocks outperform value stocks during bull market, but value stocks win during bear market. And they win so much, that they outperform growth stocks in the long run. So, I guess he meant to say it’s a good time to invest in value stocks, especially after the longest bull market in history. I’m not going to follow that advice, but I find it tempting.

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Do some backtesting for the last 50 or 100 year. I’m pretty sure you’d be worse off than the index.

Is it a surprise that growth stock outperform index during bull market? It’s pretty obvious I guess, the problem is they also go down much more during the crash than the overall index (plus, it’s tricky to rebalance during radical changes) - in bear market it’s better to keep high dividend (like utilities) and value stocks. Long term it obviously makes sense to keep both.

You’re mixing up something. All of these are growth stocks. A value stock is a stock that trades at a lower price relative to its fundamentals, such as earnings, dividends, sales or other financial indicators.


Growth/value is a characterization based on fundamentals, P/E, P/B, div yield, revenue growth, etc. While there’s no exact definition, it all highly depends on whom you ask and their motives, with today’s P/E of 30 MSFT is most definitely no value!

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Good point, you nail it.
My second point on doing this is that, the top 5 companies are once bought the most (% wise) in many… manyyy indexes ETFs and funds, so the flow of capital will continue

They can very well also turn out to be the top 5 companies most sold during a market crisis.

Momentum is a very strong factor but it’s not without risks. Also be sure to check beta and sharpe when backtesting, don’t just look at pure performance.


Check my last update regarding the performance from 2006 to 2010 passing through the 2008. The performance of the top 5 was much better than the VTI.

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Again, do it for the last 100 years. 10 years are irrelevant in terms of statistics. Hell, even 100 years are bad.

I guess this doesn’t hold for all crashes, as there are periods where value outperforms and periods when growth outperforms. If it were so easy to guess which period is coming I’d sold VT and buy growth or value fund. With 5 biggest growth stocks it’s even more tricky because we lose the benefits of diversification.

…keeping mind, that you won’t these stocks yourself for a hundred years.

No but you can see if this strategy would outperform the market over 20 years and if so, in how many periods (out of all possible periods).

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