Morningstar Ratings Are Recency-Driven

First, a big thank-you to everyone who joined me for the AAII presentation last Saturday. I appreciate your patience during my rocky Zoom start—and a special shout-out to Suzette Moskwa, who saved the day by running the slides!

As promised, I’m following up on your chat comments and questions from the session. This week’s focus is on your insights; in the next couple of weeks, I’ll share a full Q&A edition covering listener questions on portfolio construction, diversification, and long-term investing strategy.

Key Takeaways from This Week’s Discussion

1. ETFs vs. Mutual Funds — Tax Efficiency Matters
   Mutual funds often create higher annual taxes in taxable accounts. ETFs and index funds are more tax-efficient because of how they handle capital gains—saving investors up to 1% a year. Keep mutual funds inside IRAs to avoid unnecessary taxes.

2. Equal-Weighted vs. Cap-Weighted Portfolios
   The Invesco Equal Weighted S&P 500 (RSP) holds the same 500 companies as the standard index but gives each stock equal weight. This creates different exposure and more turnover, yet the ETF version reduces the tax drag—a key advantage for long-term investors.

3. Small-Cap Value Funds — Choosing the Right Fit
   VBR (Vanguard) performs best when large-cap growth leads, while AVUV and DFSV outperform when smaller value companies rise. The lesson: size and style matter in long-term returns.

4. The Power of Rebalancing & “Shannon’s Demon”
   Mentioned by Bill Yount from the Catching Up to FI podcast,  Shannon’s Demon illustrates how periodic rebalancing can turn volatility into profit. By selling high and buying low, you can enhance long-term performance while keeping risk in check.

5. Morningstar Ratings — Don’t Chase the Stars
   Star ratings mostly reflect recent trends, not future potential. Focus instead on the underlying asset class and decades of evidence, not last year’s winners.

6. Small-Cap Value Slump — Patience Pays Off
   Small-cap value has struggled this year, but historically it offers one of the best long-term premiums. Remember: asset class selection drives up to 99% of overall portfolio performance.

7. Risk Parity Portfolios — Balancing Risk the Smart Way
   Paul compared traditional diversification to risk parity, which balances exposure across stocks, bonds, and commodities. He prefers government bonds over commodities since bonds generate income and often rise when stocks fall.

8. Diversifying Within an Asset Class
   Instead of going “all or nothing,” you can hold multiple ETFs—like AVUV and DFSV—for extra balance within a category. Just keep the lineup manageable for your brokerage or platform.

9. Factor Investing — What Really Drives Returns
   The strongest long-term drivers are size and value. Momentum and quality can help, but smaller, cheaper companies historically deliver the best rewards.

10. Growth Funds & Ten-Year Performance
    Ten-year snapshots can mislead. From 2000 to 2025, small-cap value funds far outperformed growth and the S&P 500, showing the value premium remains powerful across full market cycles.

11. S&P 500 vs. Total Market — Nearly Identical Over Time
    Since 1928, returns differ by only 0.1%. The S&P’s recent edge comes mainly from a handful of mega-cap tech stocks, not fundamental differences in the indexes.

12. Hiring an Advisor — When It’s Worth It
    A skilled fiduciary advisor can help manage emotions, discipline, and rebalancing. If you struggle to stay consistent, professional guidance may be worth far more than the fee.

13. The DIY Investor Myth — Overcoming Human Biases
    “No one cares more about your money than you” sounds good, but behavioral biases—recency, overconfidence, and loss aversion—can derail results. Automation or a trusted advisor can protect you. For more insight, see Paul Hayes’ free book Spending Your Way to Wealth, especially the appendix on 48 investor biases.

Thank you again for your time, attention, and thoughtful participation. Despite the technical hiccups, your engagement made this an incredibly rewarding session!