The cover of Sports Illustrated, Centerfielders, Pitchers, Quarterbacks, Fighter pilots, Arnold Schwarzenegger, The Rock, Oprah, Warren Buffett…. We can all visualize and think of the greats when benchmarking a person or company. How do they measure up, right?
Nike and Phil Knight, Facebook and Zuckerberg, Microsoft and Gates. If you dig deeper and read about the individuals and successful companies, you will find a common thread throughout their persistence, success, and overcoming all odds. They did not do it alone and had massive help…. Hang with me.
How often do you hear on the nightly news, check on your smart phones and tablets, or read in the newspaper about how the “market” did or is doing? Most of the time when speaking about the “market” there can be a fixation on the S&P 500. It’s the benchmark of all benchmarks. Sexy, just like the names and companies mentioned above. America loves the biggest, brightest and the best. That’s what has driven this country to such prosperity.
S&P 500
So, what makes the S&P 500 the belle of the ball? Good question. I’ll drop some history…. Created in 1957 by Standard and Poor. Then 1966 rolled around and McGraw-Hill purchased the rights and now S&P Dow Jones Indices controls it. The 500 most widely (popular) held stocks are tracked in the weighted-index and these are the companies we all brag about owning or should’ve owned at cocktail parties, coffee shops, and in-between sets at our local gym. In some ways, I equate this index to high school. To be “included” you must have a market capitalization of at least 5.3 billion dollars. This is what makes the S&P 500 so fancy. We all know and buy these heavyweights products, goods, and services.
Rollercoaster
I love rollercoasters, especially old school wooden ones. The climb to the top is slow and rickety, but what a rush as you crest over the top and throw your hands up as you come crashing down. Ups, downs, sideways, and being whip-lashed all over the track…This is a great segue back into the S&P 500, which has been doing the exact same in 2018. Let’s buckle up for our own 2018 500 index rollercoaster ride; first trading day of 2018 was Jan 2nd, 2695 points. Top for 2018 came on Jan. 26th, 2872 points. Bottom on Feb. 8th, 2581 points. We currently are riding along at Feb. 23rd, 2747 points. There is no height requirement here, the ride is long and volatile as we’ve seen and felt this year. But, what if I told you according to a Wall Street Journal article on Thursday, February 22nd that only 3 companies are powering the index so far in 2018: Amazon, Microsoft, and Netflix. These three have accounted for nearly half of the S&P 500’s advance. Obviously, the year is early, but we will continue on the rollercoaster.
Free Lunch
The only “free lunch” in the investing world is located on the menu of Diversification. If you take away anything from this blog, note, letter. Call it what you wish. The investing world is an enormous buffet. One can easily get distracted into thinking that the only performance up or down comes directly from our S&P 500 or Dow Jones Industrial Average (follows 30 companies). Let this be a good reminder to think not just domestically and to always understand exactly the types of investments you own or would like to own. Our money needs help from other areas of the total markets (Stocks, Bonds, International) to be successfully diversified.
Diversification
There are 11 sectors in the United States equity market; Technology, Consumer Discretion, Financials, Heath Care, Industrials, Materials, Telecom, Utilities, Real Estate, Energy, Consumer Staples. 11 sectors are broken down into Large-cap, Mid-cap, and Small-cap…. Now let’s continue because you have International and Global (The Americas, Europe, Asia, Africa, and the Middle East). Bonds are also a monstrous piece of the pie when using the diversification approach. Corporates, Treasuries, High yield, Emerging debt. Do you understand how it can get very blurring from just relying on how the “market” is doing in conversation?
Above are the extensive ingredients available to create and bake investment portfolios. Everyone is different, but we aren’t unique when discussing risk levels. Conservative, moderate, growth and income, aggressive. The changing economic environments and seasons call for different flavors and spices to be added or withdrawn from portfolios. My fundamental beliefs and principles focus on asset allocation and diversifying across many market sectors, and companies.
The ups and downs will continue, but the objective is to smooth out the ride if you despise volatility. I’d like you to hold down your food as you become more knowledgeable of the investment markets. Not having all your eggs in one basket (like the S&P 500, single stock, mutual fund, ETF, and any other index is a good starting point). The proper diversification based on your risk tolerance and goals is free lunch for you and your money.
Baseball is back! The Grapefruit League (Florida) and Cactus League (Arizona) have been welcoming the boys of summer. Spring training games and debates in the barber shops about who will win the pennant are coming to a block near you. The days are getting longer, and it won’t be long now…
Your baseball lovin’ and roller coaster navigating friend,
Justin