You need perspective in this market, especially when it seems like everyone is doing the same thing. One way to gain it is to work on a tree lined street in Newport, RI. Here in January when it’s 18 degrees, the constant wind brings new meaning to the task of “asset protection.” It’s a stark contrast to the glitzy lobbies of NYC with their boutiques selling cold pressed coffee or flavored lattes. That sounds pretty nice right about now. Life has a way of giving you perspective whether you like it or not. Here’s my perspective on indexing and the S&P 500.
The S&P 500 is a market cap weighted index, meaning that the stocks with the largest market caps have the most influence over the price movement of the index. To calculate market cap you multiply the company’s shares outstanding by the stock’s price. All you need to know is when price is part of the equation, then the value of the index is based on investor perspective. It is the market, which isn’t to say it’s “high” or “low.” It could be high vs history etc., but at the end of the day: It is what it is.
So here’s some perspective: Since the larger a company’s market cap is, the greater a percentage of the index it represents, the largest companies have out-sized influence on the movement of the index. The top five influencers of the S&P 500 have a market cap greater than $375b. They are: Apple, Google, Microsoft, Berkshire Hathaway, and Amazon. That’s a lot of influence from a handful of companies when the average market cap for a company in the index is only $42b. So the next time someone tells you they’re diversified with the Index 500, don’t forget to have a little perspective.