"A man's accomplishments in life are the cumulative effect of his attention to detail."
- John Foster Dulles, American Diploma

In This Edition

Cap-weighted vs. equal weighted S&P Index Funds
NEW! 2 Funds for Life Fine Tuning Table
Happy Holidays!

Dear Friends,

For most investors the process of investing is a series of 1000s of small to big decisions over a lifetime. Our work is focused on helping investors make a relatively small number of very important decisions where the probability of success is very high. In some cases the decision to go right or left is not likely life changing. In other cases the odds are clearly in your best interest and the additional reward is meaningful.

We have recently had a lot of questions about using equally-weighted S&P 500 instead of the cap-weighted funds. Let’s explore this decision. Almost all S&P Index funds are capitlization-weighted. Wikipedia says, "A capitalization-weighted (or cap-weighted) index, also called a market-value-weighted index is a stock market index whose components are weighted according to the total market value of their outstanding shares. Every day an individual stock's price changes and thereby changes a stock index's value. The impact that individual stock's price change has on the index is proportional to the company's overall market value (the share price multiplied by the number of outstanding shares), in a capitalization-weighted index.”

In a cap-weighted index bigger companies can have a major impact on the daily ups and downs of an index. In the case of the S&P 500 Microsoft and Apple each represent about 7% of the value of the index and the the 10 biggest companies drive about one-third of the value.

In an equally weighted S&P 500 fund the 10 largest companies would represent the same percentage of the holdings as the 10 smallest companies. So the 10 largest and smallest companies would represent about 2.5% of the portfolio value.

So which is better? We have the ability to compare real time performance of the two as both the Vanguard S&P 500 Index (VFINX) and Invesco Equally-wtd S&P 500 Fund (VADDX) have been available since 12/31/1987.

And the winner is? It depends on the time period and the kind of investment you have made.

For the almost 36 year period since 12/31/87 the Vanguard Index has compounded at 10.7% and the Invesco Fund 10.9%. A $10,000 investment grew to $399,341 for VFINX and $414,646 for VADDX.

On the other hand, for the past 5 years VFINX has been the clear winner with VADDX underperforming by over 2% a year (13.4% vs. 11.1%).

But an important key to good investing is to be sure you look at all the expenses. In this comparison it turns out the bigger question is whether the investor is comparing results in a taxable or tax-free or tax-deferred account.

The equally-weighted portfolio has about 10 times more trading built into keeping the portfolio true to the equal-weighting. This additional trading cost is reflected in the return but what isn’t included is the tax impact.

According to Morningstar the after tax impact on VFINX is a .3% reduction in annual return and in the case of VADDX a 2.2% a year tax cost.

So for taxable investors VFINX is the clear winner and for those not worried about taxes it’s a question of the time period or sequence of returns. When a relatively few big companies are driving the market VFINX should outperform. And VADDX is likely to do better during periods of better returns for smaller companies.

2 Funds for Life Table Video and Podcast

Paul Merriman and Chris Pedersen introduce the 2 Funds for Life Fine Tuning table and describe how it can be used by investors of all ages to evaluate various combinations of target-date and small-cap value funds.

Historically, these combinations have produced higher returns and higher safe withdrawal rates with only modest increases in risk compared to the target-date fund alone. The table provides investors a way to see what these differences have been in the past for target-date funds across their lifetimes when combined with 0% to 50% small-cap value in 10% increments.

Paul and Chris also discuss rebalancing approaches and the methodologies used in the backtests. Whether you're a young investor, mid-career, or well into retirement, we think this information will be relevant and hope that it will be life-changing.

Watch the video here.

Listen to the podcast here.

Happy Holidays from Paul Merriman and Team

Happy Holidays! Whether you celebrate Christmas, Hanukkah, Kwanzaa, or any other festive occasion, I hope it's filled with joy, peace, and wonderful moments. Wishing you a fantastic holiday season!

Want great stock-market returns without great risk? It’s possible if you do these two things.

2 Funds for Life Fine Tuning Table

Call To Action!

Here are a few simple ways to support the financial education work of The Merriman Financial Education Foundation, a registered 501(c)3. In so doing you help better the lives of individuals, families and communities, creating more opportunities for all.

Subscribe to our weekly “Sound Investing” podcast, available on your favorite listening platforms and leave a review. Tell us what you think!
Subscribe to our YouTube Channel, and hit the thumbs up, subscribe, leave a comment and share the link with your social media and friends.
Use our M1 Finance affiliate link to set up a brokerage account and use our portfolio suggestions. If you fund your account with a minimum of $1,000, our foundation will receive a one-time affiliate fee —at no cost to you—which helps support our financial education projects.
Follow us on Facebook, Twitter and LinkedIn
Buy our latest books, We’re Talking Millions! 12 Simple Ways To Supercharge Your Retirement and 2 Funds for Life: A quest for simple & effective investing strategies; all the profits help support our work.
Support our mission by making a tax-deductible donation to the Foundation.

In This Edition Cap-weighted vs. equal weighted S&P Index FundsNEW! 2 Funds for Life Fine Tuning Table Happy Holidays!

In This Edition

Cap-weighted vs. equal weighted S&P Index Funds
NEW! 2 Funds for Life Fine Tuning Table
Happy Holidays!

Little things mean a lot