Thursday, December 22, 2005

Inanity continued

Jonathan Clements writes in his "Getting Going" column that rebalancing should be be done less frequently. It seems that this wrongheaded idea follows entirely from another mistaken idea: that markets can be timed. Momentum strikes again! (cue the soundtrack). Clements even goes so far as to quote William Bernstein (an investment advisor from North Bend, Oregon) who pronounces "that there's significant evidence of momentum in asset class returns". Is this evidence statistically significant? I think not. Clements does make one correct, albeit obvious, point: rebalanceing has tax consequences. duh. Why don't we let the fools be fools and we'll go ahead and invest in equal weighted, frequently rebalanced portfolios (Adi, Mike, Cengiz) or the good old value weighted portfolio (Dean).


At 8:26 AM , Blogger Dean Foster said...

What are the tax implications of equal weight portfolios? I know vanguard has managed to get the taxes way down on the value weighted index (as they say--rates too low to quote on the internet). So how much tax drag is there for the best practice in equal weight investing?

At 10:12 AM , Blogger J. Michael Steele said...

The new kids on the EFT block are the indexers with a difference: Jeremy Siegel and Jonathan Steinberg are in the process of registering ETFs that are "dividend indexed." Given that dividens are periodically cut in half or even eliminated (Ford, GM, etc) you can trigger some very substantial revisions. Moreover, the revisions are at times easy (nay, triivial) to forecast, so if these ETFs develop any substantial volume the ETF arbs will have a field day.


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