Understand the 800-Pound Gorillas in the S&P 500

By Daniel Jordan Photography @Shutterstock

OK, this stock market is top heavy. Remember, you buy the stock market when you buy a 500 index. But do you know how that index works? Look at the S&P 500 for example. Sure, it’s 500 stocks, but about a third of the index is dependent on five companies. Why? Because it’s a market cap weighted index meaning the size of a company, its market cap (price times shares outstanding) dictates its influence.

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“Remember when a trillion dollars was a lot of money?” asks Spencer Jakab in The Wall Street Journal’s Heard on the Street feature, “Gigantic Stocks Are a Reason to Worry.” Five companies have reached that level recently. And look at Apple. Its market cap is approaching $3 trillion. What does this mean? “The precedents aren’t encouraging,” explains Jakab and he continues why, here:

One obvious reason is that even passive investors are increasingly betting on just a handful of stocks vulnerable to a dud product or regulatory setback. Thinking of it in terms of buying an entire business is helpful: Would you rather own the iPhone maker or all of McDonald’s, Walmart, AT&T, Philip Morris, Berkshire Hathaway, Procter & Gamble, JPMorgan Chase, Starbucks, Boeing, Deere and American Express combined? A lot would have to go wrong all at once to torpedo that diversified group of blue-chip stocks.

Action Line: This is a top-heavy market where you need to ask yourself how many iPhones can Apple really sell? Invest every dollar like it’s your last. And invest in terms of thinking about having that dollar buying a business.

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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.