This is What Happens When a Few Massive Companies Outweigh the Others

You need perspective in this market, especially when it seems like everyone is doing the same thing. One way to gain it is to work on a tree lined street in Newport, RI. Here in January when it’s 18 degrees, the constant wind brings new meaning to the task of “asset protection.” It’s a stark contrast to the glitzy lobbies of NYC with their boutiques selling cold pressed coffee or flavored lattes. That sounds pretty nice right about now. Life has a way of giving you perspective whether you like it or not. Here’s my perspective on indexing and the S&P 500.

The S&P 500 is a market cap weighted index, meaning that the stocks with the largest market caps have the most influence over the price movement of the index. To calculate market cap you multiply the company’s shares outstanding by the stock’s price. All you need to know is when price is part of the equation, then the value of the index is based on investor perspective. It is the market, which isn’t to say it’s “high” or “low.” It could be high vs history etc., but at the end of the day: It is what it is.

So here’s some perspective: Since the larger a company’s market cap is, the greater a percentage of the index it represents, the largest companies have out-sized influence on the movement of the index. The top five influencers of the S&P 500 have a market cap greater than $375b. They are: Apple, Google, Microsoft, Berkshire Hathaway, and Amazon. That’s a lot of influence from a handful of companies when the average market cap for a company in the index is only $42b. So the next time someone tells you they’re diversified with the Index 500, don’t forget to have a little perspective.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.