Comments On The BTSX/BDOW Strategies - #3
One thing that often strikes me is how the market seems to coalesce around certain stocks and/or a sector for years on end. Currently, it seems that anything technology related can do no wrong (I would argue that this technology trend has largely been the case since the Great Recession). As a result a lot of money has flowed in to the stocks of companies that have shown to be leaders in this space and consequently they have gotten quite large in size.
For an index investor this is something to keep an eye out for since indices are market-cap weighted, i.e. the companies with the largest market capitalization make up the largest portion of the index. This means that buying the index alone can cause your portfolio weighting to be skewed in favor of such companies.
This isn’t a problem in itself. Why wouldn’t you want to own more of what is doing well? Moreover, if you expect these companies to keep growing their profits you definitely want to be along for the ride.
But the reason to keep an eye out for it is if this weighting skews you in the direction of just one sector. This may/may not be in line with your ideal allocation. At the time of writing of this blog, the top 7 companies in the S&P 500 account for 22.5+% of its total weighted market capitalization. And they all lie in the technology sector.
If this skew makes you a little uncomfortable you can counteract this by buying some ETFs that are equal-weighted. It’s exactly as it sounds; every stock in the index has an equal weight regardless of how large or small the company is.
But I actually quite like this market-weighted skew.
“The first rule of compounding is to never interrupt it unnecessarily” - Charlie Munger
If your investing strategy follows the BTSX/BDOW strategies then you have most likely avoided the technology stocks as they tend to be expensive and don’t pay generous dividends.
But it’s hard to deny the role that technology has played in our lives over the last few decades, and it shows in the current makeup of the S&P 500.
It also shows in the BTSX results last year: the strategy underperformed the index by a whopping 15.12%.
If this causes you grief then I want to remind you that judging any investing strategy solely on its performance in any one given year is imprudent. I also want to remind you that the BTSX has outperformed the TSX60 index by a ridiculous amount over the last 30 years, so much so that your nest egg would have been 72% larger if you had been solely invested in the BTSX vs the TSX60.
“Diversification is the only free lunch (in investing)” - Harry Markowitz, Nobel Prize Winner in Economics (1990)
I also want to remind you that the BTSX/BDOW is simply a strategy: you can follow it exactly or adapt it for your own personal needs/comfort-levels. After all, maximizing returns is rarely the sole reason people invest or choose one investing strategy over an other.
I can’t speak for anyone else, but I can tell you that being able to not think about my investments is the biggest reason I invest the way I do. I believe that travelling in the right direction is far more important that the speed of your travel. It’s important to do things for the right reasons, so that the things you do end up being the right things. It’s automaticity at it’s finest.
In short, I like having a good-night’s sleep. I know I can’t be the only one.
You will notice that around 30% of my own portfolio is invested in index funds. I don’t have an exact argument for doing this other than that I think owning index funds increases my portfolio diversification, which decreases my portfolio risk.
It’s not a strictly logical argument and I don’t have any data/chart to go with this thesis. But then again, investing isn’t logical either.
Being invested in index funds has tempered the relative underperformance from 2020. And because of that I have been able to sleep well at night. Having 30% of my portfolio in index fund may also temper the positive returns from the BSTX/BDOW strategies, but I know that I’ll still be able to sleep well at night.
I am human: a social animal that is subject to my emotions and to those of others around me. While I think I’m doing the right thing with the BTSX/BDOW strategies, I also don’t like missing out on this technological revolution that I believe is here to stay.
In short, I have FOMO. And that’s ok. I know I can’t be the only one.
This doesn’t mean participating in obviously crazy pump and dump schemes. But it’s ok to buy Microsoft or Apple or Zoom. They’re good companies with solid products used by an increasing cohort of people everyday and profits to go along with them.
“[Common sense says] that when people make decisions about what they like, they do so independently of one another. But people almost never make decisions independently — in part because the world abounds with so many choices that we have little hope of ever finding what we want on our own; in part because we are never really sure what we want anyway; and in part because what we often want is not so much to experience the “best” of everything as it is to experience the same things as other people and thereby also experience the benefits of sharing.” - Duncan Watts, Sociologist, University of Pennsylvania
I recently came across this excellent video that offers a refreshing take on investing in technological revolutions based on what historical data shows on past historical revolutions. I highly recommend you grab a cup of coffee and watch it in its entirety.
