Edit: it’s easier to just buy XLG (top 50 companies in S&P 500). But this underperformed the S&P 500 more than desired in the past 30 years. Pivoting to VUG and MGK since they have an almost perfect correlation to the S&P 500 and decisively outperformed it over the past 30 years I’m testing a portfolio that passively follows the top 10 companies at the intersection of VOO and QQQ by market cap. VOO coz I believe the US is globally best structured for long term growth (despite that debt problem). QQQ because it is the best performing non sectoral ETF for 20-30 years. (Yes, despite being tech heavy, QQQ actually isn’t a tech etf) Here’s my results: Backtesting the portfolio beats Voo and qqq by 12x and 8x over a 10 year period. Just wondering about the tax complications since I’d be paying taxes to rebalance and replace. ETFs have mechanisms to avoid this. But the portfolio would also beat MSFT over 10 years. Doesn’t beat NVDA, TSLA, AMD but I think picking super hot stocks and holding them for ten years is a different game from the passive management game. But if someone would show me how, I don’t mind. “Diversification is safe but concentration is more profitable if you know what you’re doing.” - Peter Lynch The top 10 have an annual turn over of 30% but it’s 60% after 4 years. So it changes a lot. But it’s hard for a top 10 company to go below top 15 so my plan is to only replace a top 10 company if it’s out of the top 15 or if it’s been out of the top 10 for more than 3 years. This would mean I’d replace around half of all stocks every 4 years on average. From past data, using this strategy, I’d have held 5 stocks such as MSFT for 24 consecutive years if I started in 2000. I’d sell and replace at least 3 stocks every 4 years though. By comparing mega cap, large cap and small cap stocks to Voo, I find the mega cap stocks actually mimic the market trends over 10 years. They tend to be more overvalued by PE ratio but will outperform the undervalued stocks over a 10 year period according to one of my back tested comparisons. By comparing respective ETFs, Mega cap outperforms large cap which outperforms small cap. The only downside I see to this is taxes. But if the taxes are higher but the profit is still higher than owning Voo or Qqq then it’s still a win. Thoughts? TC: $154k (New Grad)
Backtest it (much) longer than 10 years. Think 70+ years.
Any tools you recommend
Python should be fine.
What are you using to backrest? Is it taking DRIP into account?
You need to backtest this for 30+ or ideally 50+ years to see if it really works, since the past 10 years were one of the greatest bull markets in US history. That would require you to continuously update the top 10 companies throughout the backtest and in your investing strategy, if you implement it.
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So basically FAANG + Broadcom+ Tesla + Costco ? Yes they’ve returned much more than broader index (in fact SPY’s growth is driven mostly by its top holdings). But how long will that last? When will you sell them? Companies don’t last forever.
Yeah. Pretty much right now. I plan to sell and replace once a year under these conditions. As soon as the company drops out of the top 15, I sell. But if the company drops out of top 10 but is still in the top 15, I hold. If company never goes back to top 10 in 3 years, I sell
I estimate I’d sell at least 3-4 companies every 4 years on average