Portfolio Selection: The Power of Equal Weight

TL;DR

This paper demonstrates that an equally weighted S&P 500 portfolio outperforms the traditional market cap weighted portfolio, and introduces the MaxMedian rule, which further surpasses the equal weight strategy over a long historical period.

Contribution

It empirically compares equal weighting and market cap weighting, and introduces the MaxMedian rule, a simple, non-proprietary investment strategy that outperforms traditional methods.

Findings

Equal weight portfolio outperforms market cap weighted portfolio.

MaxMedian rule beats equal weight portfolio over 1958-2016.

MaxMedian provides a simple, effective investment approach.

Abstract

We empirically show the superiority of the equally weighted S\&P 500 portfolio over Sharpe's market capitalization weighted S\&P 500 portfolio. We proceed to consider the MaxMedian rule, a non-proprietary rule designed for the investor who wishes to do his/her own investing on a laptop with the purchase of only 20 stocks. Rather surprisingly, over the 1958-2016 horizon, the cumulative returns of MaxMedian beat those of the equally weighted S\&P 500 portfolio by a factor of 1.15.