What is the S&P 500? All the financial news outlets reference it. Is that the entire stock market? Should I invest in an index fun?
These are typical questions that I get asked. Unfortunately, it’s not that easy to give specific investment advice without know what your specific goals and financial situation is. However, I can help educate you on what these financial terms mean!
The S&P 500, which is short for Standard & Poor’s 500. It was introduced in 1957 as an index to track the value of the largest 500 public U.S. corporations. Standard and Poor’s provides financial data, credit ratings and various indexes.
The requirement to be included in the S&P 500 are determined by a committee and must meet certain liquidity- based size requirements, one of which being a market capitalization of $14.6 billion or greater. (So pretty big) 😊
Below is a screenshot of the Top S&P 500 holdings vs Bottom holdings by market capitalization.
As of 02/23
As you can see the majority weight of the index is covered by 5 companies. (Apple, Microsoft, Google, Amazon and Tesla)
So, what should you take away from this?
Take Away #1: Do you want 50% of your portfolio invested in 5 companies?
If you are invested in an index fund that measures the S&P 500, then a big risk you have is diversification. This means that, in this example, if those 5 companies (possibly even 1) have a down year, your entire portfolio could have a down year.
Take Away #2: Do you want 50% of your portfolio invested in tech companies?
So not only do you have a high concentration in 5 companies, you have a high concentration in 1 market. That market being technology.
Take Away #3: Do you believe bigger is better?
Apple wasn’t always the size it is today. Where do you think a lot of the return from Apple came from? The answer is when it was smaller and you invested in them. That jump from a small company and large company often times brings a higher rate of return.
Take Away #4: Do you want any international companies?
I’m not talking about random companies you’ve never heard of. For example, a company like Sony. It’s a Japanese company. There are times when international companies do better than U.S. companies. Do you want some percentage of your portfolio invested outside the U.S.?
Take Away #5: The S&P 500 is not “The Market”
A market is a place where buys and sellers meet to engage in an economic transaction. There are many “Markets” Some examples:
- Housing Market
- Stock Market
It’s important to understand how you are invested so that you are taking the proper risk associated with your goals. The more knowledge you have about the true risk associated with your investment choices, the better you can control your behavior. Which in the end, as we’ve all heard, Behavior is what can make or break your investments.
Hope this was helpful! Let me know!