Why a Cap Weighted Index can skew results
We believe in Financial Planning first with your Investment Portfolio as the resource to help fund your goals. We also believe emotions impact whether a client can achieve their goals, so our job is to help guide clients in making the best decisions to achieve their goals. This is why we guide clients to be goal focused vs. performance driven as I have seen clients make emotional decisions in a rising market such as during the .com boom years as well as when when we have a large downturn like we have seen recently with Covid 19 or even during the Great Recession of 2008/2009. In either case decisions may be made out of the FOMO- Fear of Missing Out or the Fear of Losses. What we hope to do is provide you with information so you can avoid either type of fear.
When we talk about benchmarks we often discuss the S&P 500 as one of the major indices clients look at to understand performance. In order to understand this it is important to consider the construction of this index as a Market Cap Weighted Index. The reality is the index may not be as indicative of the market as clients may think. More than 20% of the S&P 500 is comprised of 5 of the largest tech stocks. Knowing this does this make you think differently about the index? For clients who may be near or in retirement, an index like the S&P 500 is not an accurate benchmark for the performance of your portfolio. From a planning perspective it is important to consider concentrations in any particular security, so knowing how much weight these 5 tech stocks contribute to the index should be understood. As of April 2020 approximately 21% of index is at record levels invested in the handful of companies. Comparing the chart above you can see how in the year 2000 how a handful of other companies had dominated the index. I can still remember people telling me how I should never consider selling their GE Stock. At a recent price around $7 a share this is about 1/9th the price it had been 20 years later. What would be the impact to your Retirement if the GE Scenario happened again?
- The top 10% of the stocks within the S&P 500 represent 50% of the total allocation of the index.
- The smallest 10% represent only about 1% of the allocation; and
- The smallest 250 stocks (half of the total 500) in the market-cap-weighted S&P 500 Index represent only 12% of the total asset allocation of the index.
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SECURE 2.0 Act Enhancements Across the Retirement Continuum
Whether you have student loans, need to catch up in the final years before retirement, are facing taking required minimum distributions in retirement, or want to enact a charitable giving strategy, new rules create a smoother path.
At University Financial Strategies our mission is to help families think beyond just saving for college, but helping leverage strategies that leverage your unique situation to help you save on college costs. We take into consideration topics like specialized college-planning strategies for business owners, planning for financial aid, school-specific scholarships, coordinating college planning with grandparents, cash-flow strategies and options for covering shortfalls, to name just a few.
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