A cap-weighted portfolio stays cap weighted when the market moves. Thus, you would not withdraw from specific funds due to market moves. If you are holding them at market cap weights, then to maintain market cap weights you would have to sell from all of the funds in cap-weighted proportion. You also would have to make new contributions to all of the funds in proportion to cap weights.I've been reading up on slice and dice portfolios, and it appears that it is not technically necessary to introduce tilt in order for a portfolio to be slice and dice. Does it mathematically make sense to, say, slice a total market index into a number of more specific funds focusing on certain caps and growth/value segments without overweighting those segments in terms of cap weight compared to the total market index? Is there any advantage in decumulation phase in having those segments separately? Does it make sense to have an opportunity to pick what to sell depending on market movements?
A minor exception is that most indices you will consider are free-float-adjusted. The free floats of stocks don't change much, but they change occasionally. A free-float-adjusted cap-weighted index does need to be rebalanced when floats change. You now also would have to recalculate the weightings of the slices regularly, and make adjustments accordingly. The adjustments would be small enough that it could be done through contributions or withdrawals. This would be a bit of a nuisance to calculate changes that mostly would be insignificant other than to prevent gradual drift from cap weight over time.
After reading the above, one might think that it is just some minor extra work and minor extra source of errors to get to the same result as holding the market portfolio in a single fund. That it would seem to be the same result would be expected. After all, the funds are just containers. Should it matter how you assign parts of the portfolio into containers?
Turns out, it does, though only a little bit. When a fund buys or sells a stock, the transaction cost is charged off to the fund. If you slice the market into separate fund products, then when stocks moves between slices (when there are index changes), one fund you hold will sell the stock and another will buy the stock. The funds you hold will pay transaction costs out of fund assets for the change, only still to hold the same portfolio, with just a slightly different mapping to fund containers.
This is a very small effect-- if a 401k offers index funds as market slices it is not a serious detriment to use them instead of a total market fund. I probably would let go of trying to replicate the market precisely in that case, and just use fixed weightings of the slices. Generally, slicing the market across funds is fine if it enables you to hold the portfolio you want to hold, but is a slightly inferior way to hold the total market portfolio.
Statistics: Posted by Northern Flicker — Sun Jan 12, 2025 1:31 pm
