Blog 6 - Merits of an Equal Weighted Portfolio

"Most of us have roughly the same ability to predict the future. The trouble is being right as often as the average forecaster won't produce superior results."— Howard Marks, Co-Founder and Co-CEO, Oaktree Capital Management

Since performance and corrections consistently surprise investors, equal weighting removes enormous guesswork from over/under-weighting decisions. Your efforts are better spent finding quality stocks and building a diversified, equal-weighted portfolio that places all corporate leaders on equal footing.

As Howard Marks suggests, unless you're an exceptionally consistent forecaster, let democracy prevail. The Oasis Growth Fund is equal-weighted and benefits in these 6 ways:

Six Benefits of Equal Weighting

i. Easier Portfolio Building

Investing equal amounts in each stock eliminates one of portfolio management's most challenging activities: rendering overweight or underweight decisions per sector, industry, and security.

ii. Let Corporate Leaders Lead

Over the long haul, most portfolio growth comes from intelligent decisions by the corporate management teams. An investor's most sacred duty is to pick great businesses at great prices. Advancing share prices will eventually reflect these decisions. Equal weighting objectively captures the performance of these leaders, irrespective of the market cycle—allowing dynamic growth in smaller companies while retaining the sustainability of proven compounders.

iii. Enhanced Performance Potential

In 2018, S&P Dow Jones Indices published a 17-year study titled "Outperformance in Equal Weight Indices"¹ (Figure 1).

 Figure 1: Outperformance for Equal Weight Indices

Research has demonstrated that equal-weighted portfolios can enhance total performance relative to market-weighted indices through:

• Increased exposure to smaller, faster-growing companies

• Lower exposure to slower-growing mega-caps

• Greater exposure to value stocks, which periodically outperform growth counterparts

iv. Improved Risk-Adjusted Returns

Figure 1 reveals that equal-weighted portfolios generate a superior Sharpe Ratio (0.54 vs. 0.32) relative to capital-weighted indexes despite a slighty higher Std Dev for the equal-weighted portfolio (17.1% vs. 14.8%).

Moreover, by periodically trimming overweight positions, overall portfolio volatility can be effectively reduced. The law of "reversion to the mean" is real—proactive rebalancing on advancing positions allows an investor to build up cash prior to that next market pullback. A double win.

v. Simplified Rebalancing Decisions

Periodic rebalancing becomes an objective exercise. By establishing a threshold (e.g., 20% gain over average position), rebalancing decisions become systematic rather than relying on economic forecasting and human judgment.

"Rebalancing is another way of introducing certainty into the volatile domain of the capital markets."

Such contrarian rebalancing objectively reinforces counter-cyclical practices on your terms—without the emotional challenges that arise during corrections.

vi. Redirect Time & Energy Toward Value Creation

Instead of wrestling with economic models and constantly rethinking relative weightings, allocate capital equally between core positions. Then focus on implementing more value-creating decisions, such as Writing Covered Calls (Tier 2), Writing Opportunistic Put contracts (Tier 3), and deploying active protection (Tier 4).

Equal Weight in Five Steps

Equal weighting is discretionary, but here's a systematic approach to create a sector-diversified (aligned with S&P 500), equal-weighted core portfolio:

1. Determine the Number of Stocks to be Held

Figure 2 provides six equal-weighted combinations (10, 15, 20, 25, 30, or 35 stocks). This methodology aligns sector weights as closely as possible with S&P 500 sector weights in Figure 3.

 Figure 2: Equal-weighted Portfolio Allocations

Example: For a 20-stock portfolio (5% per stock), you'd hold four Financial Sector stocks, three Healthcare stocks, two Industrials, etc.

Figure 3: S&P 500 Sector Weights – Source

2. Segregate Candidates by Sector

Ensure representation across at least 9 of 11 economic sectors (Materials and Energy are discretionary). If your prospect list lacks two candidates per sector, either adjust search filters or expand your candidate pool.

3. Rank Stocks by Risk-Measured Priority

Choose one ranking approach based on desired performance characteristics:

• Highest performing stocks (5-year average)

• Beta between 0.9-1.2 (offensive vs. defensive market movement)

• Lowest standard deviation (defensive stocks with growth)

• Highest Sharpe Ratio (growth relative to volatility)

After applying 19 selection filters, all stocks should hold your highest conviction. If preferred stocks don't make the final cut, you can consciously overweight a sector—but now you'll know where vulnerabilities exist and can apply additional risk management.

4. Select Top Stocks per Sector

Choose stocks according to your desired performance profile. If some of your currently owned stocks don't measure up, put them through the same filterns to determine whether their performance, business merits, and diversification fit are worthy.

Key Notes

• Equal weighting does not mean equal exposure to all 11 sectors. Figure 2 keeps sector exposures proportionate to the S&P 500 Index (Figure 3).

• When calculating equal investment amounts, adjust for FX rates on Canadian or foreign stocks.

• To calculate stocks per sector: Divide 100% by the total number of positions, then divide S&P 500 sector weightings by that percentage.

Summary

Equal weighting removes the temptation to try to outsmart the market. Threshold rebalancing reduces market timing misconceptions—both notorious investor pitfalls.

Although rebalancing is effectively micro-market timing, the intention is never all-or-none decisions. Instead, partially trimming positions after significant advances respects the inevitable volatility of the capital markets. Periodically realizing gains injects a degree of certainty in an otherwise highly uncertain arena.

An Equal-Weighted Portfolio:

✓ Simplifies the target amount to invest and rebalance per stock

✓ Rebalancing to thresholds renders rebalancing decisions to be far more objective

✓ Disciplined rebalancing diminishes the anxiety associated with trying to time out of the markets. Save the cash for that next pullback.

✓ Improves management effectiveness - Your time can be better spent deploying other value-creating decisions in other parts of the portfolio (Tiers 2,3, &4).

✓ Should generate higher absolute results and better risk-adjusted returns than market-weighted portfolios.

"You're not rich until you have something money can't buy." — Garth Brooks

Resources:

• The Investing Oasis - Chapter 12: "Equal Weighting a Portfolio"

Footnotes

1. Edwards, T., Lazzara, C.J., Preston, H., & Pestalozzi, O. (2018). "Outperformance in Equal Weight Indices." S&P Dow Jones Indices ↩ 

Jay T. Mason, CFA, CFP manages the Oasis Growth Fund and is the author of

“The INVESTING OASIS: Contrarian Treasures in the Capital Markets Desert”,

as well as the education series: More Buck for Your Bang.

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The Oasis Growth Fund is Series O of the Fieldhouse Pro Funds Inc trust series available by Offering Memorandum in Canada through select Financial Advisors. This education series is not intended as a solicitation for investment in the Oasis Growth Fund nor is it sponsored by Fieldhouse Capital Management Inc.