Below is the year-to-date (YTD) performance of various major indexes from December 31, 2019 to February 28, 2020.
Although NLO’s Best lost –4.51%, the groups that we would have selected declined –7.57% or –7.32%. So while –4.51% is less than half the loss of the Dow Jones Industrial Average (our benchmark), our personal favorites would not have done as well.
There is a need to point out the rationale of investing in the major indexes or choosing to buy an S&P 500 Index fund. The conventional wisdom is that the more broadly diversified the index the lower the volatility and risk. The trade-off of choosing a broadly diversified index is that you’ll achieve relatively diminished returns on the upside.
Along with diversification, quality is a key component to the change in indexes on the way up and down. Conventional wisdom suggests that higher quality will be last to fall and lower quality will be first to fall. Magnitude of change also is assumed to change along the spectrum of quality. Higher quality generally does well in the early stages of a rise and decline. Lower quality generally overperforms in the late stages of a rise and severely underperforms in early stages of a decline.
Although broadly diversified, indexes like the Russell 2000 or S&P 600 hold lower quality stocks which results in a more rapid decline in price. Alternatively, narrowly diversified indexes like the Nasdaq 100 and Dow Jones Utility Average thrive as their quality of holdings leave investors less willing to sell in a general market decline.
We take a certain level of pride in the fact that, on the whole, our stocks of choices reflect higher quality in spite of the extremely low number of positions that are included. We believe that our overall analysis puts investors in a better position when making the choice between buying an S&P 500 Index Fund with zero expense ratios while having limited funds to invest with.
The following is the breakdown of the Dogs of the Dow (found here) in week nine, compared to other fundamental ratios and varying portfolio sizes. Continue reading →
