Key items you need to know –
Better understanding how the stock markets work will make you a better investor, but more importantly, should help you be less emotional about the swings in the market. For example, The S&P 500 Index is made up of 500 stocks, but the Top 5 have a market cap greater than the bottom 250 stocks in the index. Does that make sense? Of course not. We like to follow two other indexes that are more representative of the market. The first is OEF. This is the S&P 100 Equal Weighted Index. Of course it isn’t exactly 1% for each of the top 100 because of daily fluctuations, but it better represents the top 100 market cap weighted stocks. We also like RSP. This is the S&P 500 Equal Weighted Index. Similar to the S&P 100, but tries to equal weight all 500 stocks. Now most investors will use SPX (ticker for S&P 500) or SPY (ETF for the S&P 500) as the barometer for market performance. Remember SPX and SPY are heavily weighted to the Top 5 stocks (AAPL, MSFT, FB, AMZN, GOOG). Over the last 5 months, those five(5) stocks have gone sideways, up, but sideways relative to the overall stock market. RSP, the S&P 500 Equal Weighted has Outperformed the SPY and OEF for over a year (see chart below).
What does all this Technical speak mean?
This means the “broader” market has been doing much better than the top 5 stocks in the last 12 months. Even more so since the March 23rd, 2021 COVID bottom. If your portfolio is focused and allocated across industries and sectors to reduce volatility, you actually did better than someone that was concentrated in a few specific areas. We have been preaching forever as its seems (I’m sure the avid readers know this), you can’t always compare your portfolio and portfolio performance to the SPY (Or the S&P 500 Index). Every investor is different with their investment objectives.
For example, the hottest sectors over the last year; Cannabis, Electric Vehicle, Pharmaceutical, BioTech and Real Estate have been quite volatile during this time. Does this mean that there is no more momentum in these sectors or time to get out…..it depends on your objectives. Typically when you are a long-term investor, you should have a 3-5 year horizon line. Unless something drastic happens to that sector or overall market, review quarterly reports and see if they are still “in-line” with their Revenues and EPS along with guidance in their projections. If so, just because the overall market is stagnant, your long-term thesis on investments should remain the same. Don’t trade your portfolio, invest and stay smart. You will end up with greater long-term performance. Sage advice in uncertain times.