Thursday, November 02, 2006

Investing II

The New York Times article which I cited in my previous post mentioned index funds that employ non-conventional weighting methodologies, for fear of over-investing in bubbles. Over at Stumbling and Mumbling, Chris Dillow adds much wisdom.

An equal-weighted basket of FTSE 350 stocks has hugely out-performed the capitalization-weighted index - 36% against 21%. This is because the cap-weighted index has been dragged down by poor performance by mega-cap stocks, Glaxo and Vodafone, and because mid-cap stocks have out-performed larger ones. Our letter baskets benefit from this equal-weighting. But fund managers, being closet trackers, have lost by being roughly cap-weighted.

But beware

As Isaac Tabner says, over the long-run, cap-weighted indices beat equal-weighted ones.

And he signs off with a very smart point indeed.

There's a big difference between being rational and being right.
As my new chum Daniel Finkelstein says, you cannot judge the quality of a decision by its outcome.

Read the whole thing- its the kind of writing you won't often encounter in the mainstream press.

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