This article is written exclusively for Investing.com. Part I}} was published yesterday.
On Monday I discussed the fact that there is no single "Market" to represent your portfolio, but that does not prevent the media from choosing one when discussing the day-to-day running of the various securities markets. It is usually the most commonly used index, if only for the fact that the big numbers grab the eye.
At first glance, the Standard & Poors 500 Index appears to be a much better choice to measure your results. Unless, of course, you have a balanced portfolio of smaller but still listed companies with a market cap of up to $ 2.5 billion or so. Or your positions also include some medium-sized companies in the $ 2.5 billion to $ 10 billion range. Or any number of bonds, bunds, REITs or defensive income positions. Should this be the case, you may have just created a well-diversified portfolio that offers downside protection and growth at all levels.
But those would not be the measures! & # 39; The S & P & # 39; is a capitalization-weighted index that takes into account not only price, but also price times the number of shares outstanding. This feature means it is an index that searches the 500 largest companies in the US by market capitalization. It started in 1923, but didn't become an index of 500 stocks until 1957.
For investors, it has evolved that indexing "the market" with the cap-weighted S&P 500 still means putting most of your money into just a certain portion of what most people invest in. This is because the companies with the highest prices and the largest number of shares outstanding make up a larger portion of the index's value and therefore affect performance much more than the smaller ones (but still large enough to be among the 500 largest) .
Some S&P 500 companies have market caps in excess of $ 1 trillion, which is about 200 times larger than the smallest S&P 500 components, which are still quite large (though not for comparison), with market caps of $ 6 billion or $ 7 billion
The S&P 500 is the index most professionals use as a benchmark when comparing their own investment performance, as it is considered the most representative index of American business and industry, manufacturing, and services. An investment in the S&P index gives you about 80% of the US operating income. But it's all about price hike and dividends paid, although the average dividend of the entire S&P is less than 2% today – hardly a factor for retirees (or non-retirees) seeking income.
If the S&P 500 collapses one day, your portfolio, if it consists of the aforementioned defensive securities, REITs or income stocks and income funds, will likely outperform the S&P (and incidentally the equally large Dow .)
On the other hand, if the S&P 500 roared the next day, this same wallet could confuse you – or be angry with whoever advised you about the benefits of being more the tortoise than the hare on your investment . Just remember it's not a fable; when investing, the turtle usually wins over time.
The S&P 500, like the Dow, is also rebalanced with some frequency. Underperforming that the quotation standards cannot maintain must of course be started. But too often, like the Dow, the committee that decides which companies to include doesn't just start up those companies and replace them with the next suitable one in line. Oh no.
The most recent “we really need to keep track of our interests” decision – not the index's original charter – put Tesla (NASDAQ 🙂 in the benchmark at a point earlier than # 500. The high-flying electric carmaker may or may not be overtaken by rivals with much deeper pockets in the years to come, but sure, because today it is helping the S & P's sex appeal by adding a business by over 900% in the last 12 months.
While you're thinking about that, allow me to move on to the third of the most popular stock benchmarks, the. The NASDAQ is also a market capitalization weighted index, this time of the roughly 2,000 plus companies that trade on the NASDAQ exchange.
"Relatively" newly established in 1971, the makeup of "the Naz" is weighed heavily on information technology companies, which were initially too small or unprofitable to qualify for a listing on the older, then larger exchanges.
While the Composite represents more than 2,000 individual companies, the, a subset of the NASDAQ Composite, represents more than 90% of the NASDAQ Composite movement. And the top 10 stocks in the NASDAQ Composite themselves account for a third of the index's performance.
All of the Big Three indexes mentioned above deal with the practice of exchanging old names for new ones, often in what is, or at least appears to be, a rather random way. This makes sense in a way, as I noted. We often think that the powerhouses of our generation are invincible – but in a country where individual initiative is thriving and people are inventing entirely new industries in less than a decade, progress comes quickly and often from unexpected directions.
Remember this in 10 years (or less?), When operating systems are free, bandwidth costs next to nothing and a biocomputer or photon computer makes silicon "old news". Even one of my favorite industries for the next 10-20 years, and will one day be supplanted by advancements in solar photovoltaics.
I promised to include the. In 1984, in an effort to include more securities, the Frank Russell Company created the Russell 3000. This index represents nearly 98% of the US stock market in which to invest.
It is the measure I use to ensure that my portfolios always have a number of smaller, hopefully emerging companies represented. Many other portfolio managers agree with me; many mutual funds and ETFs are tied to or based on the Russell 2000.
And unlike the three previous indexes, especially the Dow and the S&P, the median value for a company on the Russell 2000 today is $ 2.1 billion. Most of these companies are not big enough to conduct international trade, so what some see as an advantage to the R2000 is that it is a better partner to the US economy as the components are more domestically oriented.
There are many more indexes available, some for US mid-cap companies, others are variations on the above themes, and many delve deeper into the sector or industry level. I always advise clients and readers to note the various benchmarks, but to assess their own portfolio in a much more important way.
Our personal measure should be, "Am I closer to achieving my goals than x years ago," not "Did I beat the Dow today? Did I? Did I do that?"
Investment Ideas from the Cited Indexes
I will cite 3 specific problems from my own portfolios with a short thumbnail sketch. This is just an introduction to these companies. Upon request, I can click here may perform a more in-depth analysis on Investing.com.
I've owned many stocks of the venerable old Dow over the years, and this year 3. At this point, however, I'm only Dow Inc (NYSE 🙂 for a long time, no relationship whatsoever to the index. I bought it on July 20, 2020 for $ 41.48. It is currently $ 55.40.
One of the smaller components of the 30 Dow Giants, I bought Dow Inc because they are a leader in chemicals and materials science. Still, they were quite cheap compared to what I thought their outlook was. The Midland, Michigan-based company is quite strong internationally, making it less dependent on one economy, and providing the most basic and essential ingredients for products that hundreds of millions of people around the world need on a daily basis. The company has 36,000 employees in 31 countries with more than 100 factories making their vast array of ingredients and products.
The following: Comcast (NASDAQ :). It's the 19th largest factor in the S&P 500 – and this colossus still weighs just one-eighth that of Apple! I bought Comcast because I believe media – be it social, anti-social or anti-social – will be a big part of our future. I bought my stock on June 29, 2020 for $ 38.65. The current price is $ 51.75.
The cable subsidiary of CMCSA provides high-speed Internet, video, voice, wireless and more to residential and business customers under the Xfinity brand. The company also owns both NBC and Telemundo broadcast networks. Their film division consists of well-known names such as Universal Pictures, Illumination, DreamWorks Animation and Focus Features. The theme parks segment operates Universal theme parks in Orlando, Florida; Hollywood, California; and Osaka, Japan. It also owns the Sky News broadcast network and Sky Sports networks, as well as the Philadelphia Flyers.
Why Do I Need Comcast? Media, media and more media.
Finally, since yesterday, I own shares of the Baron Discovery Fund (BDFFX). Baron is one of my go-to mutual funds. (I own five of their different funds for different purposes.) I like Baron's philosophy that they are absolutely agnostic when it comes to forecasting "market events". You can read 100 different opinions about the vector of the Biden Presidency or the likelihood that EU regulators will or will not curb Big Tech, etc. But really … no one knows. Baron understands that and buys when prices are right for the best companies they can find and sells when they are no longer the best companies.
Baron Discovery (NASDAQ: {{6382 | DISCA) is one of the company's three small-cap funds. It is, as its name suggests, the one who is looking for the most innovative companies in the small cap universe. In that sense, it can be considered a bit more risky than the other two Baron funds in this asset class. I do not think so.
I believe, while some may be bypassed, small caps are too late for a major rally when we come out of the overpriced huge caps. The innovators who survive in this field will more than make up for the occasional ones that fail. BDFFX is up 47% so far. I believe there are many more runways ahead of us than behind it.
Warning: Unless you are a Stanford Wealth Management customer, I do not know your personal financial situation. Therefore, I am offering my opinion above for your due diligence and not as advice to buy or sell specific securities.
