Portfolio vs Index

​The most commonly asked question of financial advisors is “why didn’t my portfolio perform as well as the S&P 500?”  Interestingly, clients don’t seem to ask this question when the S&P 500 falls 10% and their portfolio drops by 5%...  I will take a couple of paragraphs to address the current state of the market, viewed through the eyes of the S&P 500 and a typical investor.

First, let’s examine the history of the S&P 500 (S&P).  The index as we know it began in 1957, when Standard and Poor’s expanded its well-known list to 500 companies.  However, the S&P goes back to 1926 when it was known as the “Composite Index,” and it was made up of 90 companies.  The S&P is a weighted index, based on market capitalization (Majestic’s advisors can explain this if you would like).  As an investor, the index is used in different ways.  It can be used as a benchmark – how did your portfolio compare to the overall S&P?  It can be used to “buy” the market – buy shares of an S&P ETF or mutual fund.  Or it can be used to identify stocks that may fit an investor’s portfolio based on the stock’s weighting in the index.

Over the course of years, the companies that make up the index have changed – in some cases substantially.  Only seven of the top 25 companies in the S&P in 2001 remain in the index (let alone in the top 25).  Many of the companies that are no longer a part of the S&P are well known companies that have experienced a change in consumer demand for their goods/services.  Due to the change in world economics, only one company that was in the top 10 in 2001 still remains in the top 10.  Microsoft is still the number 2 weighted company in the index.

This brings us to 2022 and 2023.  In January of 2022, the major indices (S&P 500, Dow Jones, NASDAQ) all started dropping.  Over the course of the first quarter of the year, all three entered correction territory and remained in Bear Market territory until early 2023.  The primary reason for this was the drop in the big names of the indices.  Apple, Google, Amazon, Microsoft, Meta (Facebook) and others dropped over 30% each.  Owning the S&P through either a mutual fund or an ETF, means a drop point by point without owning any of the individual companies that were falling.  This scenario can create heartburn every time the news reports a drop in the S&P.

​In 2023, this trend reversed.  As of the writing of this blog (11/6/2023), the S&P has gained 13.71% (which means it is still below 2021 levels).  This is above the average annual return of the index.  However, 12 companies have made up 34% of this gain.  The Information Technology, Communication Services, and Consumer Discretionary sectors are all up over 33%, more than double the overall index.   The stocks driving the S&P are: Nvidia, Meta Platforms, Tesla, Royal Caribbean, Carnival, General Electric, Palo Alto Networks, PulteGroup, Airbnb, West Pharmaceutical Services, Advanced Micro Devices, and Booking Holdings.  Do you recognize all of these companies?

SO, when a 2023 investor asks why they haven’t had the S&P 500 return, the answer is simple – do they own these 12 companies?  It’s not a recommendation.  The choice is whether to own individual stocks – and accept the risk that they could fall substantially – or own an index and potentially limit exposure to both the losses and the gains of these same stocks.

The bottom line to investing is to make sure that your goals and time horizon align with your portfolio.  If you want simple investing and you don’t mind your portfolio just moving with an index, an ETF that matches the index might be the right investment.  Personalization of a portfolio may increase both risk and return – which may be what the client wants.

Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS
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Disclosures:
*Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
*The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
*Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.