“Why did the scarecrow win an award? Because he was outstanding in his field.” - Dad [joke]
My boys and I were recently at a little breakfast spot on Father’s Day. By the way, did you know that Father’s Day is ranked as the 14th U.S. holiday (behind Earth Day)?[1]
I noticed another dad coming in with his two daughters and a son. I am guessing the oldest daughter was 5 and the two young ones were very close in age or twins around 3. All four were [mostly] dressed nicely, the father had on a sport coat, the girls were in dresses, and the little man was in bow tie.
The oldest girl was wearing a blue and white dress with scuffed red cowboy boots, clearly a battle dad lost before leaving home. The younger girl had on a dress, but no shoes, and I am fairly confident the dress was on backwards. The boy was literally running circles around the other three making engine noises on the way to their table. Things seemed to calm down for a few minutes as all three settled into their respective coloring pages/menu. There was a brief dustup about who was going to get the red crayon – oldest won. Once the drinks arrived, further calamity ensued as the youngest girl promptly removed the top to her drink proclaiming “I’m a big girl” before spilling it across the table.
This dad really took all this in stride. He never lost temper or raised his voice. He was genuinely enjoying himself. This man had an enormous amount of patience, understanding, and focus. He was committed and nothing was going to distract him or take away from his goal of having a special Father’s Day breakfast with his kids.
We are bombarded with distractions and noise that wear on our patience and distract us from our long-term goals.
There are plenty of distractions when it comes to our financial plans and investment portfolios, but one of the biggest may be the stock indexes. Don’t misunderstand, I look at the S&P 500 index every day and at times it can be an indication of what is happening. And other times it can be a screaming toddler with no real connection to reality.
What is the S&P 500? It is not the market, rather a sampling of some of the companies that comprise the market. It is an index that essentially consists of the 500[2] largest (by market capitalization) publicly traded companies in the United States. Market capitalization (cap) is calculated by multiplying the number of outstanding shares of a company by its current stock price. A company with 10,000,000 shares currently trading at $43 would have a market cap of $430,000,000.
A reasonable assumption would be that each of the 500 companies has an equal weight in the index – they do not. The S&P 500 is a weighted index. Each company makes up a different percentage depending on the market cap of that company.
Apple has occupied the top spot within the S&P for several years. Apple currently represents roughly 7.50% of the index. If the index was an equal weight, Apple would represent 1/500 (0.2%) rather than the 38/500 it does in the market weight calculation. The next five companies (Microsoft, Amazon, Nvidia, Google, and Facebook)[3] represent approximately 25% (rather than 6/500 - of the S&P 500 Index.[4] This does not make these companies better or worse, just the largest. In 2016, Apple and Microsoft were the top two, but Exxon, Johnson & Johnson, and General Electric rounded out the top five.
Through Friday, June 16, 2023, the S&P Index was up just over 15% year-to-date. The year-to-date performance of the six companies mentioned above actually account for over 17% of the total return of 15%.[5] This means that the other 494 stocks of the S&P Index [combined] are down approximately 2%. The Index is up dramatically over a six-month period, but most companies are essentially flat to down. This is not currently a good indication of the market.
Maybe the most distracting thing about indexes is their inescapable connection between two dates – January 1 and December 31. In my career, I cannot recall a single instance of a client needing to invest everything on January 1 and sell everything on December 31.
An index can be barometer, but it can also be a distraction.
Please let me know if you would like to discuss fathers, toddlers, indexes, or anything else on your mind.
My Best,
Ryan
[1] The Top Tens. Sourced from - https://www.thetoptens.com/holidays/favorite-holidays/
[2] The Index currently has 504 positions.
[3] The corporate name for Google is Alphabet. The corporate name for Facebook is Meta.
[4] S&P 500 Companies Weight – Sourced from http://slickcharts.com/sp500.
[5] Sourced form Google Finance
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.