Thursday, December 16, 2010

Equally Weighted vs. Cap Weighted

Did you know there are two versions of the popular S&P 500 market index? The equally weighted version is similar to investing the same amount of money in each of the 500 stocks tracked. This varies from the more popular capitalization weighted version of the index, which is effected more by the movements of larger companies.

It has been widely reported that the S&P 500 averaged an annualized loss of 1% during the last decade (these statistics represent the performance of the cap-weighted version of the index). You might be surprised to learn that the equally weighted version of the index (ticker: S&P EWI) gained 6% annually over the same period, even though it invested in the exact same companies.

A main factor contributing to this disparity is the fact that the equally weighted version of the index is rebalanced quarterly, while the cap-weighted benchmark is not rebalanced. This is further evidence that rebalancing is a systematic strategy that's intent on buying low and selling high.

Sidenote: The "Best Stocks, Best Funds" proprietary strategy utilized by Net Worth Advisory Group operates similarly to the equally weighted version of the S&P 500. For instance, each of our stock portfolios (large cap growth, international value, etc.) consist of 50 stocks with an equal investment in each stock. Consequently, we do not place larger bets on some companies than on others. Further, the "Best Stocks, Best Funds" strategy is rebalanced annually, normally near the beginning of each calendar year.

1 comment:

Dr. Len Schwartz said...

Financial Advisor Marketing - How to get on TV and double your practice in the next 4 weeks

This is the best time of year to pitch ideas to your local radio and TV stations
because good sources of stories are in short supply.

Many businesses, companies, schools and colleges "close" for Christmas vacation.
Most people are focused on shopping, or travel, or plans for the New Year, etc., and the
last thing many Financial Advisors are thinking about is pitching a story.

That is GREAT news for you and it means a lot of opportunities
for you to pitch your solution (how you help people) for your viewing public.

When you pitch, let journalists and reporters know you're
familiar with their work. Suggest a story (idea) for a specific
section of the newspaper, or even better - a pre or post-holiday TV talk show
segment. Consider pitching a "before and after" type of segment so you can show
your viewing public something of value in 5 minutes or less. This will generate enormous exposure and generate unprecedented word-of-mouth - not to mention a significant amount of potential new Financial Advisor leads.

Dr. Len
Pres/CEO of Pro2Pro Network