On April 16, 2019, from John G….. Ontario, Canada
What was your motivation to switch from SPY to RSP? I understand the RSP exchange-traded fund (ETF) rebalances its exposure to less expensive stocks in the S&P 500 and trims stock that has become more expensive. But there is increased volatility and a higher MER.
Monday Morning Millionaire Program Answer:
The above chart shows that over the last decade, RSP, an equal-weighted ETF has outperformed SPY, a cap-weighted ETF. As you state, RSP, an equal-weighted ETF gives each of the 500 stocks an equal 0.02% of the fund and keeps it that way. In a capitalization-weighted ETF, the market price of each of the stocks influences the ETF. The stocks with a greater price have a disproportionate impact on the ETF.
Disregarding of the volatility and the MERs, RSP outperformed SPY. Using history to predict the future is unreliable but it is the best tool which we have. We made the switch based on history alone.
Since we made the switch one month ago, RSP has gone up 4.08%while SPY has gone up 3.65%. That 0.43% difference over the course of such a short time period is meaningless but it does suggest that the switch was a good decision. Both ETFs are a good way to buy the entire American economy and over the long run, both will likely give a good result. Both fit the Monday Morning Millionaire Program philosophy of practicing the habits of highly effective investors. Let us review them again.
HABITS OF HIGHLY EFFECTIVE INVESTORS
1: HAVING AN EARLY, DISCIPLINED SAVINGS PROGRAM
Unless this habit is in place, the other five don’t matter. Except for our savings rate and asset allocation, we have no control over the forces which influence our portfolios. Accordingly, increasing our savings rate is the best investment that we can make.
2: SELF-DIRECTED (DO-IT-YOURSELF) INVESTING
We need advisers for tax planning, mortgages, record keeping, incorporation, estate planning, debt reduction, trusts, annuities, etc., etc., etc. but not for investing. After subtracting their fees, only a tiny percentage of advisers can beat the simple act of buying and holding an exchange-traded fund which mirrors the S&P 500 index. We can easily do that ourselves and save our year’s income over the course of an investing lifetime.
3: BUYING THE ENTIRE U.S. MARKET
That is, don’t pick stocks. Each stock transaction has two sides to it (buy or sell) only one of which can be correct. Princeton University economics professor Burton Malkiel stated, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” By buying and holding an exchange-traded fund which mirrors the S&P 500 index, we are buying shares of the strongest economy in history.
4: BUYING AND HOLDING
Investors who have this habit do not try to time markets; they do not trade. They know that over the long run, investors, professionals included, even people who use a vast array of technical indicators, almost never outperform the market over the course of a market cycle because they have timing skills.
5: BUYING LOW, SELLING HIGH
This is an issue of rebalancing our portfolio to our personally determined asset allocation. 50/50 is common. 50% of the portfolio is in a market index exchange-traded fund (ETF) and 50% is in a U.S. money market fund or cash. Depending investors’ risk tolerance, the allocation can be 60/40, 70/30, 40/60, 30/70 and so on. Anytime that this relationship is thrown off balance by 5% to 10%, either by market growth or by market decline, investors can rebalance their portfolios and grow rich.
6: AVOIDING COMPLEXITY
No one has ever shown that investing in structured notes, principal-protected notes, master limited partnerships, collateralized mortgage obligations, equity-indexed annuities, non-traded REITs and other hard to understand “products” can outperform the simple act of buying and holding an exchange-traded fund which mirrors the S&P 500 index.