Comparing your investments to an indexAug 11, 2020
Have you ever compared yourself to someone else? Never, right?!
Our investment portfolios are the same. Although most of us don’t share our account values with our neighbors and friends, we do compare them to the general market. But is this really a good practice to do? For as long as investing has been around, comparing to the greater market index has been the norm.
The past 5-10 years the technology giants known as the FAAAM stocks (previously FAANG) has interrupted this theory.
Let me explain…
The S&P 500 is a stock market index that measures the stock performance of the largest 500 companies listed on stock exchanges in the United States.
The FAAAM stocks (Facebook, Apple, Amazon, Alphabet, Microsoft) have been the drivers behind the S&P 500. Not that they have been the best performers among the 500 companies, but that they carry the biggest market cap within the index. So when they go up a little, it makes the index go up a lot.
What does market cap mean? It’s the total dollar value of a company’s outstanding shares. You calculate market cap by multiplying company shares outstanding by current market price.
The larger the market cap, the more it influences the index. In 2010 the largest 5 companies made up less than 11% of the index, today the top 5 make up 23%.
Let’s break down the returns from the S&P 500 for 2020. As of July 31, 2020 the S&P 500 has a return of 3%, and only 2% as shown in the graph below a few weeks earlier. But let’s break this down further between the FAAAM stocks and the other 495 companies that make up the index.
The FAAAM stocks are up 35% for the year…the ‘others’ are down 5%!!
Amazon is up almost 70% to the end of July – driven by stay at home orders and more people using their services.
Apple is up over 50% in 2020 – and was recently sold in our clients portfolios to capitalize some of the gains.
Although the FAAAM stocks drive the market, they haven’t been the best performers on the S&P 500, that honor belongs to Carrier Global Corp, returning 131% YTD. There are many right behind with close to 100% gains. Here are the top 30 performers on the S&P 500 in 2020.
In total there are 142 stocks that up at least 10% or more, while there are 220 stocks that are down 10% or more.
So when you start comparing your portfolio performance to the greater market, be aware of how the greater market is structured and how the numbers are likely skewed by the few leaders.
While monitoring your portfolio is good due diligence, I encourage you to focus more on the long term strategy around your investing strategy and risk profile vs comparing to the greater markets.
If you are not already an investment client and would like to discuss how your current portfolio structure, please reach out.