The King is dead! Long live the King!
As many of you know, we have been talking about some big potential changes in the way the investing world views the S&P500 (S&P) index. According to an article from GlobalData, the top 10 positions in the 500 stock index accounted for 37.5 percent of the entire index’s holdings.
According to Financial Times, Warren Buffett, one of the most famous supporters of individual investors investing in the S&P, has sold the last of his S&P index funds in late 2024.
As a review – a few reasons why the S&P is so important to how the market has operated over the last 20 years:
s It is the benchmark most often used to measure the performance of the US equity market.
s Most retirement plans for US workers have an S&P (or S&P clone) fund for their employees to invest in. This creates a constant flow of new purchases to help support the values of those underlying stocks.
s Many US equity fund managers own similar concentrations of stocks to the S&P to keep their overall performance and volatility in line with what investors expect to see by following the index.
s Professionals like Warren Buffett touted the advantages of owning the S&P – vs other methods of diversification.
For the last few years, we have also become more concerned that if everyone agrees it’s “the best” way to invest, valuations and concentrations will get overheated. It seems that this year more and more professionals are becoming concerned.
Our view is that there isn’t anything wrong with the 500 stocks, so much as the overconcentration to the top 10 holdings. That is why we have used other products that invest more evenly in the 500 holdings.
If this long-term trend is truly starting to sunset – it will likely take time to unwind. That could provide some great opportunities to carefully recraft allocations to areas of the markets that have been greatly ignored for many years.
We have also started using a new manager (part of the ARC family) for larger accounts that build portfolios out of individual stocks, bonds, and other products. This new option is giving us some capabilities in risk management and tax efficiency that we have not been able to provide at a reasonable cost before.
The S&P may have been the king for a long time because it provided good diversification at a fair price. Diversification still reigns supreme, even if we choose to look elsewhere to find it.
The market is always evolving. We will continue to do our best to find the best ways to structure your assets to help you accomplish the things that are more important than the money itself. If you would like to know more about how we are addressing the changes we are all seeing, let us help!
The Standard and Poor’s 500 (SandP 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in this index.