The “Stay Focused” grocery bag, and the Magnificent 7 Stock Performance
The trash caught my eye as I walked past.
Trash in the passenger seat was piled nearly to the ceiling. Fast food containers, shoes, clothes, papers. On top of the pile was a tan canvas shopping bag with “Stay Focused” written in pink letters.
Stay Focused- at least the intent was there, right?
Focusing on investment performance takes time and effort. If you don’t check periodically, you might be surprised at what you find.
Keeping investing simple
Many investors purchase stock index funds, which are a basket of stocks that mirror a particular stock index. For example, the Standard and Poor’s (S&P) 500 index “is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.” (Wikipedia)
In fact, the S&P 500 index hit an all-time high just a few days ago.
Yay!
Lots of investors own S&P 500 index funds in retirement plans. It gives the investor diversification and exposure to stocks in dozens of industries.
So what’s actually in the index?
Spreading out ownership
Morningstar explains how dollars are invested in the fund:
“Because the index is weighted by market capitalization -- the number of shares on the market times share price -- higher-value companies take up bigger weightings and lower-value companies take up smaller positions.”
Another interest stat:
“Stocks in the S&P 500 make up about 80% of the total U.S. equity market capitalization.”
Wow.
For every dollar invested in U.S. equities, 80 cents represents stocks in the S&P 500.
Now, about that great performance recently…
The Magnificent Seven
The Magnificent Seven are tech stocks with large market capitalizations- names you may know:
Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
Alphabet is the holding company that owns Google, and Nvidia makes hardware that is used in AI.
From the Wall Street Journal:
“The seven companies accounted for 28% of the market cap-weighted S&P 500 as of year-end, according to S&P Dow Jones Indices.”
How have these stocks performed?
“Last year, the Magnificent Seven member stocks more than doubled, adding a combined $5.1 trillion in market value, according to Dow Jones Market Data.”
The bottom line?
Seven stocks are driving much of the gains in a 500-stock index.
Now, that’s not all bad.
How investing diversity can work for you
The S&P 500 assigns stock to one of 11 sectors. Each sector’s basket of stocks may perform differently, based on economic conditions.
Let’s take the retail industry.
When consumers are more confident, they’re likely to spend more, which may increase sales and earnings for retailers- and stock prices.
On the other hand, healthcare and tech stocks can perform better during a recession. You’ll still visit the doctor and pay for tech during an economic downturn.
The lesson
Diversification makes your investment portfolio less exposed to the risks of a particular stock declining in price. There may be times when a larger portion of your gains come from a small number of stocks.
If you own the S&P 500 and want to buy more of the Magnificent 7 stocks outside of an index fund, however, your portfolio will be less diversified and expose you to more investing risk.
As always, consult with a financial advisor on these important issues.