AWOL wrote:It could be but attempts have been made to attempt to analyse the route causes and they suggest that one of the key characteristics of underperforming active funds is that they try to hold around 30 or less holdings to target the winners but in doing so fail to capture the 7 or so stocks that actually drive all the return (as it's hard/impossible to identify them in advance).
But it is fractal. Holding 1000 stocks and assuming equal initial weighting you have just 0.1% invested in the best performing holding. Hold 10 stocks and you have 10% in the best. For the former the best is inclined to be a 10 times better/greater gain than the best of the set of 10, but where overall the portfolio rewards/outcome are broadly the same.
US LEXCX started in the 1930's, initially buying 30 stocks, bought and held, no changes. Broadly that matched the stock index. Similar for the 30 Dow stocks but where that was revised. The tendency with non-rebalanced is to see much of portfolio value being contained within a relatively small number of stocks, higher (concentration) risk.
19th century and bonds used to yield real rates of returns. Gold and money were the same, convertible at a fixed rate, inflation broadly averaged 0%, deposit money to earn interest and that interest was like a real rate of return, and it used to be generous too, 8% type amounts.
Following the ending of the gold standard (convertibility) and bonds broadly transitioned to being 0% real. Stocks became more popular for their real rate of return. However with modern day knowledge the academics identified that the perceived risk of stocks can be eliminated via broad indexing, and for decades you could earn 8% type real from stocks with low/no risk, 4% minimum (as per SWR). But in awareness of that prices were bid up, seeing the real return tending to decline, ultimately likely also to 0% - as per bonds. Great for the since 1980 stock investors, but perhaps much less so in forward time where stock total returns might be little different to bonds, 0% real type total return assets.
With more having surplus capital, and more being aware of the 'free lunch', the inclination is for lower total returns in forward time (next 30+ years). The secret sauce may become trading, volatility capture. 20% standard deviation in stocks is inclined to persist, considerable deviations around the mean, and simple rebalancing yearly can trade/capture such volatility.
If you have a standard deviation of 20, one £1 asset up to £1.20, another down to 80p, then 50/50 of both rebalanced still just yields a average of £1, break-even. However individually one asset down 20% one year needs to gain 25% to get back to break-even, there's a positive bias of 2.5% overall from equal weighting and rebalancing back to equal weightings that buy-and-hold otherwise misses. Doesn't really matter if you play that with 1000+ stocks/assets, or just a handful of assets. Primarily you just diversify sufficiently in order to reduce single holding risk down to a relatively low/acceptable level. For instance 20 holdings = 5% risk per holding.
