I could barely see me ever getting out of small caps until the day I
die... of course I am in my 30's and have a long way to go... I have
spoken to a few retirees recently and they suggested to me I will
change my mind when I know I don't have time to deal with a market
correction. These retirees have lots of assetts and are 100% cash/
money market in retirement.

I currently pile up dividend paying stocks in hopes of a good income
stream from them come retirement... and many of the stocks I hold are
mid cap types which pay a current dividend... so small caps have a
place in my world. They are the mid caps of tommorrow and I need
enough of them to maintain income stream if a current stock stops
paying a dividend.

I would always agree each person should invest realtive to their goals,
and I think stocks have a place in portfilio no matter the age (even
10-20% stocks in the situation previously mentioned). The equity
growth can help keep portfolio income in line with inflation. But
others I know have disagreed with me, and that's OK... I learn more
from those which disagree.

"jIM" <noreplysoccer[at]hotmail.com> wrote
- quote -

Doesn't it depends on one's goals?

Someone (in retirement, say) may hold mostly CDs but also, as far as stock
is concerned, strictly REITs and preferred stock as part of an income
strategy.

Diversification among stocks (large cap to small; domestic to international;
etc.) and bonds (junk and high grade) is of course much discussed by
financial professsionals and amateurs alike. But one point that is
overlooked often IMO is that the goal of this strategy is to optimize return
over a _long period of time_. Yet a person in retirement may be more
interested in ensuring simply that, say, income keeps up with inflation. For
the greater part, s/he's not going to reinvest dividends, for one thing. Yet
the typical "diversification in anticipation of one-day retiring" assumes
dividend reinvestment, among other things.

I would think any stock portfolio contain large caps, mid caps and
small caps, with some international stocks as well.

If one chooses not to invest in stocks, then I could understand not
wanting the risk of equities in general, but once someone took the leap
into equities, I would **think** diversification is important.

"Ron Peterson" <ron[at]shell.core.com> wrote
- quote -

AFAIC, everyone does benefit from _some_. But that doesn't necessarily
include categories like small caps or even stocks at all.

E.g. a 70-year-old male with heart problems whose genetic history indicates
he'll die within ten years, and with not a lot of money, arguably should not
be in stocks.

I'd put him in something like a diversity of high grade bonds and short-term
CDs.

It seems to me the older one is, and the less money one has, the less
diverse one should be, and emphasis should be on lower risk investments.

Elle wrote:
- quote -

I don't understand why everybody doesn't benefit from diversification.

My spouse is retiring next year, and I might have to also.

--
Ron

Elle wrote:
- quote -

You need some small caps to have a diversified portfolio.

Very small companies don't usually have options available, so I avoid
those.

--
Ron

"Ron Peterson" <ron[at]shell.core.com> wrote
snip
- quote -

I am not years away from retirement, so the usual diversification rules do
not apply.

"Ron Peterson" <ron[at]shell.core.com> wrote
- quote -

I see. I was curious about what sort of investor would have the problems you
described. Individual small cap stock positions are too risky for my blood,
but that's just me.

Elle wrote:
- quote -

I mainly get that situation with small-cap tech stocks where earnings
vary year to year. So, I wait until earnings recover. If the sales
decline heavily, I will sell to keep my capital gains down for tax
purposes.

I sell covered calls and puts for a little supplementary income and buy
some deep in the money leaps when the option premiums are low to get
leverage.

Besides the tech stocks, the other sectors I am in are the homebuilders
and energy.

--
Ron

"Ron Peterson" <ron[at]shell.core.com> wrote
- quote -

What's your timeframe for holding these stocks? As soon as the P/E etc. go
high (or low, as appropriate), you sell?

beliavsky[at]aol.com wrote:

- quote -

Another alternative is to simply not buy stocks with high P/B, P/S, and
P/E ratios. I try to do that, but earnings sometimes disappoint, and so
I am left holding the bag. It's even worse when when the sales
evaporate.

--
Ron

beliavsky[at]aol.com wrote:
- quote -


I wonder if the net effect is much different from that you acheive if
holding broad-market, cap-weighted core holding, alongside a value fund
(one heavily tilted to value). It seems the net effect is the same. If
you hold a fund based on the Russell 3000 plus a value fund then your
Y2k-Ciscos are heavily weighted in the R3k, but are 0% in the value
fund. So netted out the effect in your overall portfolio is the same as
if you fund-weighted the whole index (and then invested in a fund
tracking that index). But with the core + value approach you can do it
perhaps with less cost & turnover than holding an index fund where the
entire index is fundamental-weighted.

My point is, I think there are different roads that might lead to very
similar outcomes. You could create a fundamental-weighted index, or you
could create a portfolio that adjusts the broad market for your personal
preferences about these fundamental measures - e.g. overweighting the
stocks that pass muster based on P/E, P/B, P/S or whatever composite you
think captures valuation the best. At the end of the day it might all
look the same.

-Tad

beliavsky[at]aol.com wrote:
- quote -

share weighted- buy equal shares of all stocks in index when buying.

if 30 stocks in index, buy equal share amounts of all 30 stocks. Works
well until one wants to buy Berkshire Hathaway...

Tad Borek wrote:
- quote -

I agree, and I think the developers of the fundamentally weighted
indices do as well. If there is "noise" in stock prices, more stocks
with high valuation measures (P/E, P/B, P/S, P/D) than low ones will
tend to be overvalued. An advantage of fundamental weighting is that it
seems to provide good diversification (in the backtests, the standard
deviations of the portfolios were similar to that of a cap-weighted
index) without requiring a portfolio optimization algorithm and a
covariance matrix.

beliavsky[at]aol.com wrote:
- quote -

What happens if the cap weighted index outperforms them? They pay you fees?

beliavsky[at]aol.com wrote:
- quote -


B-
I think this is an interesting idea but at the same time, it introduces
index construction methodologies that are arbitrary (or at least, "more
arbitrary"), and that a die-hard index investor might not buy into. A
cap-weighted index reflects a belief in efficient markets - that capital
is being priced efficiently by the market, after Mr Market has factored
in all those fundamental measures. So it seems deviating from cap
weighting requires a belief that the market isn't efficient, correct?

RE: monkey - perhaps one candidate for it is the Dow 30, which isn't
cap-weighted anyway. A monkey could with five mouse clicks buy Diamonds
alongside a "Dogs of the Dow" strategy for a portion of the money...a
rote contrarian/value strategy. Or skip the Diamonds, click 30 times,
and weight it as you see fit. As someone mentioned though that's going
to take a lot of upkeep.

-Tad

Will Trice wrote:
- quote -

Cap weighted portfolios need to rebalanced only in special cases such
as changes in index membership, share buybacks, or secondary offerings.
In general, turnover is small for a cap weighted large cap index such
as the S&P 500 or a total stock market index such as the Wilshire 5000.

A fundamental-weighted index (FWI) based on (say) earnings will need to
trade more than a cap-weighted index because growth in earnings and
stock price are imperfectly correlated. An FWI that is meant to serve
as an investment strategy will probably be rebalanced quarterly or
annually.

zhendsch[at]yahoo.com wrote:

- quote -

Well, cap-weighted portfolios must be rebalanced as well. Do you think
that an earnings-weighted or sales-weighted portfolio would require more
rebalancing than a cap-weighted portfolio?

beliavsky[at]aol.com wrote:
- quote -

I don't subscribe to the WSJ, how do they solve the problem with
constantly having to buy and sell to reweight their portfolio as stock
prices change? It certainaly makes sense that cap-weighting is
suboptimal for performance, but any other weighting system would
require constant upkeep (worry is transaction costs and taxes).

I think stock indices weighted by fundamental measures of company size,
such as revenues or earnings, are a good alternative to cap-weighted
indices. A story in the 8/25/2005 Wall Street Journal, page D2, says
that Research Affiliates http://www.researchaffiliates.com/ offers such
indices -- with a performance fee of 18% of the outperformance of a
cap-weighted index. There is a paper "Redefining Indexation" at the
site showing how fundamental indices have outperformed historically.

I would not pay an 18% fee for a strategy that a monkey could
implement. I think an investor with about $100K to invest could get
similar performance by buying 20 stocks on his own through a discount
broker, with weights determined from publicly available data.