It appears that volatility wasn't the only number that was suppressed in the stock market last year: Stock correlations also remained low. So what does it mean to investors when stock correlations are low?
Figure 1. SPY vs. RSP since March 2009
Source: Yahoo! finance
To form a comprehensive picture of the value vs. equal investing difference, we construct a 30-year portfolio starting from 1986. We include all stocks listed on the NYSE, NYSE American, Nasdaq, and Arca markets, excluding ADRs. Both portfolios are monthly, including distributions. The difference between the two portfolios after 30 years is quite significant: While the value-weighted portfolio generated an 1,838.66% return, the equal-weighted portfolio returned 2,443.71%. We notice that value outperformed equal rather well during the tech-bubble perio when stock correlations were relatively low due to the crowded trade in the Technology sector. Nevertheless, during the following years, when stock correlations reverted to normal, the equal portfolio outperformed the value portfolio.
