It's a little tone deaf to claim that index funds are "bogus". Your average American worker is not going to be better off doing what you do, as opposed to throwing it all in VT/VTWAX or a Vanguard target date fund.
Index funds accomplish three things, as I see it:
* By investing in a broad basket of stocks, you can eliminate unsystematic risk. This was shown by Harry Markowitz in his landmark paper that established modern portfolio theory.
* By using an index that weights by market cap, you get, at any point in time, what the market thinks the value of the stocks are.
* By letting a management company track the index for you, you take all the work and emotion out of it.
"Building your own index" like you suggest is feasible, but a lot of work. Turnover can also be a real problem in a taxable account. My suggestion to anyone who wants to do this sort of thing is to use M1 Finance, which automates the trading for you. You just set the percentages and go. I think it could be an enlightening way to manage a small amount of "fun money", but I wouldn't do this for everything.
Lastly, there are absolutely mutual funds and ETFs that screen by financial criteria the way you're doing. Look at the Russell RAFI indexes, for example.
My favorite book on investing is The Intelligent Asset Allocator by William Bernstein. This is what made me aware of issues in correlations.
I still believe in diversification. If an ETF is sufficiently diverse I will buy the ETF. Some ETFs are not - XLE is nearly 50% Chevron and Exxon!
You should also read Taleb if you want to understand the fallacy of unsystematic risk. He is difficult to read because of his overinflated ego but he has some persuasive ideas.
What is your formula? This doesn't match what I'm used to. For example, TLT has an inverse correlation with the US stock market (-0.32 according to PortfolioVisualizer.com), so I would expect it to be inversely correlated with QQQ.
Yes - some periods TLT does have negative correlation to QQQ. I was pretty surprised when I saw this since Bernstein did not see this in his analysis.
As I said it had been 15 years since I have been actively managed my investments. When the stock market dropped I was surprised that our investments hadn't actually dropped so I wanted to find out why. So I put together a google sheet and tried to replicate the Intelligent Asset Allocator with just ETFs. This only goes back to 2005.
First I put in all of the ETFs with weekly data going back to 2005 from GoogleFinance. I then added in the dividend yields - which most online analysis does not do. Then I just used the google sheets correlation function. I set up the sheet so I could slice and dice across different time periods. And then I chose my own asset allocation based on what I saw.
I also looked at the optimal rebalancing period. It looks like it is 2 years for this set of data.
Index funds accomplish three things, as I see it:
* By investing in a broad basket of stocks, you can eliminate unsystematic risk. This was shown by Harry Markowitz in his landmark paper that established modern portfolio theory.
* By using an index that weights by market cap, you get, at any point in time, what the market thinks the value of the stocks are.
* By letting a management company track the index for you, you take all the work and emotion out of it.
"Building your own index" like you suggest is feasible, but a lot of work. Turnover can also be a real problem in a taxable account. My suggestion to anyone who wants to do this sort of thing is to use M1 Finance, which automates the trading for you. You just set the percentages and go. I think it could be an enlightening way to manage a small amount of "fun money", but I wouldn't do this for everything.
Lastly, there are absolutely mutual funds and ETFs that screen by financial criteria the way you're doing. Look at the Russell RAFI indexes, for example.