Thought hard about going with RSP+VTWO mix but in the end, too much micro management for the overall benefit. Rather keep with VTI only and accept that 2-3 of the Mag7 or Super6 correct hard (deserved) in next ~18months.
The big problem with equal weighting will always be trading costs. The fund has to trade (sell/buy) stocks all the time to retain the equal weighting.
This is a real drag on its performance and probably negates any premium it can have.
If one is going to actively not follow the index I believe there are superior approaches then under-weighting companies whose primary listing happens to be on the US stock market. Similarly the stocks clumped together by the press as “Magnificent Seven” each have very different characteristics
Well, that may be a challenge with Small Caps but at least for Mid Caps, this seems to be no challenge as such:
iShares Edge MSCI World Size Factor UCITS ETF USD (Acc) (IE00BP3QZD73) - ETF Tracking Differences and Performance
Tracking Difference of Vanguard’s Equal Weight Product is at about 0.1% - 0.2% p.a… To be honest, they could probably beat the Benchmark by 0.2% p.a. as they can deduct some of the Net Dividend. So net net, they probably lose 0.1% p.a. to trading (+0.2% post Tax Effects, minus 0.3% TER => -0.1% vs the -0.1 to -0.2% they achieve).
The only problem with Equal weighting is that there is no sensible Large Cap Equal Weight ETF. The Netherlands based ESG Equal Weight is mainly a problem from a tax point of view. The ESG Exclusion is probably not ideal but EMT and diversification ensure you receive the same return than if you equal weighted all large caps. The only Problem there is the NL Tax Location.
Long story short: Equal Weight is investable, but not perfect
I guess I do a bit of 3. I hold 75% VT, 15% AVUV, 10% AVDV. Mostly I do 1. and just don’t care though. Obviously a lot people think US companies are still worth investing in. Going against the market and reducing my US exposure would go against the entire point of passive investing, plus I just don’t have time or interest to track the CAPE of different regions. I use it to estimate expected returns, that’s about it.
Also FYI 2. won’t really help you as the Swiss stock market is also somewhat expensive (17.73 P/E 16.75 Fwd P/E 3.52 P/BV and most importantly half the index is three companies in a trench coat pretending to be a diversified stock market. Holding SPI is IMO fairly dangerous, because it offers much greater risk for no additional reward (VT is more tax efficient and cheaper to hold).
Also, nothing but for Ben Felix.
I am telling myself for years by now that NL gave me issuer country diversification (lets say IE blew up due to whatever reason). Yet, I didn’t buy myself yet as I as well can’t convince myself and the tax drag was just real. The only reason why I am thinking about buying again is as large caps currently return more than small cap…
I do plenty of mental accounting, helps me worry less, here’s some:
I started at 2021, saw the covid drop as the first test, it was over in weeks. 2022 was annoying but ultimately ended at 0. 2023 was phenomenal. I think in what I call “compounding chunks”. 2021 was chunk A, finished with a small upside, then in 2022 became chunk B, finished at zero. 2023 is chunk C, finished at a huge upside. 2024 is chunk D and doing great so far. Within these there are subchunks, I keep track of them because I record at what price I bought. Some within chunk C have done little, others (eg 4000 CHF dropped on Oct 27th) did great.
My mental accounting tells me that loss of money for chunk C would need a drop higher than 30%, and that’s still a paper loss unless I sell. Anyone who’s stayed with the US for 4+ years will practically never lose their principal, unless the US becomes a communist country.
Similar vein, I hadn’t bothered to look at VXUS, now I did and was dismayed: 17% in 13 years? Shocking. It basically cannot ever catch up with VTI, it’s mathematically impossible at this point. That’s a ton of compounding, effort and discipline put down the toilet to satisfy academics and theorists. Sticking with all-world market cap weight.
It doesn’t need to become communist to descend into civil war or default on its debt.
Edit: …or war with China - though that may actually be good for stock prices.
What may not be so good for U.S. stock prices: China cutting off their separatist province of Taiwan and prevent them from bypassing export restrictions, taxes etc. on their illicit sale of semiconductor products to the world market,
So you only invested once at let it ride? Or else your description doesnt make sense.
In reality you invest new money all the time and what happens in the future is completely open and cannot be deduced from the past.
How can 1$ I invest TODAY in VXUS never catch up with a dollar I invest today in VTI? They are at the same starting point. The dollar I invest today doesnt care a single bit on what the dollar I invested 10 years ago did.
btw those 17% in 13 years are only price and ignore dividends paid. The total return with dividends reinvested is around 100%, still not great, but not as terrible as it seems.
Edit for clarity: It has to do with how I think in the chunks I described above. It’s mental accounting at it’s worst, I realise that! What I mean is that whatever happened in the past is “let to ride” in my mind. In that sense money plugged into the US market in 2023 has torn away from money plugged in ex-US in the same year, with little chance of it ever being in the red: 20% gains (in USD) in 2023, plus nearly 6% gains YTD would need >25% drop to even go back to zero, let alone make a paper loss, let alone make a real loss if I panic sell. That makes me feel pretty good for my past decisions. It’s all emotional and mental accounting, as I said I am new into this!
Of course a CHF invested today has some chance to of doing well in either VXUS or VTI, but some chunks, tranches, years, whatever you want to call them, invested in ex-US will really never catch up, so that’s an opportunity cost. Anyway, the discussion is not amazingly productive, (but still more productive than in the Boglehead subreddit) some are concerned about US valuations, some aren’t. In any case, as I wrote in the bottom of the dip thread, I am pooling some money at the moment because I am getting fearful - if it continues to go as it does, great, going even deeper in the green, if it doesn’t I still feel fine knowing some (old) gains are nearly locked in.
Wow ! Do you really believe it ? How is it affecting your life ?
What is so “wow” about this? That’s exactly how stock markets work, you can’t predict the future based on past performance, because a very high part ofvit is human behaviour and humans are irrational.
of course it can, you only need a -80% with VTI, that only leads to a -40% in VXUS. These things happened in the past, and they can happen again.
In our recent history the largest drops were ~50-55% (depending on what index you’re looking at, VTI or VOO), twice, over ~2.5 years (2000-2002, 2007-2009), ~25% over about a year (2021-2022). Funnily enough the 1987 crash left the S&P500 with a tiny gain from year open to year close.
NASDAQ100 had indeed a 81% drop in 2000, but shrugged off the 2007-2009 drop due to not including financial companies.
The 1929 crash lead to a 90% drop over 3 years but my understanding is that policy was put in place to safeguard this from happening again.
While a 50% drop in VTI is possible, a 80% drop in one’s portfolio is unthinkable in my opinion unless we’re talking leveraged ETFs, crypto, crazy gambling with naked options/shorts etc. And of course, we should be buying on the way down as well as on the way up as many of these drops are not sudden but sustained over 1-3 years.
Just because it didn’t happen in the US (but in other countries)… doesn’t mean it will never happen in the us…
I am betting my retirement that it won’t, but keeping a global portfolio regardless.
I suppose the point is not to focus on individual chunks.
Some of them will lag, some will outperform.
What really matters is the long term growth of your entire portfolio.
But I agree, Value had a bad hit (in comparison to Growth) the last 10+ years.
History shows though that this is to be expected. At least based on the past, the factor(s) overperform.
Psychologically of course everything matters . That’s why even the most ‘fanatic’ of factor investing they Tilt and not go 100%!