Notice anything significant about that allocation? I’ll give you a hint: it’s the fact that over 17% of the fund is allocated to the financial sector. Unfortunately, financial stocks have been hammered this year. It shows in the performance of IYY, which is up around 4.97% YTD at the time of this writing.
That’s why I prefer to invest equal amounts in the ten sector funds that make up the total market index. As the table below shows, it’s impossible to know which sectors are going to perform the best from one year to another:
The equal allocation strategy would have worked out nicely this year since it limited the exposure to the financial sector to just 10% of the portfolio. Here’s the numbers for 2007:
Please note that this strategy might involve greater transaction costs since you are buying 10 funds instead of just the one fund. So, transaction costs need to be considered before going with this strategy. One way around these transaction costs is to use a low-cost brokerage firm or even a brokerage account that charges a flat fee like FOLIOfn. Still these options are only helpful if you have a decent-sized account.
Another factor to consider is taxation on the buying and selling of the sectors if the portfolio is held in a taxable account. Therefore, it’s probably best to use this sort of strategy inside a tax-sheltered account like an IRA or Roth IRA.
In a follow-up post, I’ll show you how the rebalanced portfolio performed over the years. Stay tuned…