hosted by: Business Development Specialist, Ann Vaeth
special guest: Chief Investment Officer, Brian Davies
Grab your choice of coffee as we discuss market concentration. Hear about recent and historical S&P 500 trends, and considerations for your investment portfolio.
As always, we welcome any questions you might have!
Enjoy!
Ann: Hello, everyone and welcome to another edition of company commentary I have with me, Brian. Hi, Brian.
Brian: Hi, Ann.
Ann: So what are we going to discuss today?
Brian: So today we’re going to discuss market concentration specifically related to the s&p 500, which is a broad holding across a lot of people’s portfolios. And why that you might want to think about that a little differently over the years to come.
Ann: Okay, so we’d love to unwrap there. Yeah. Where would you like to begin?
Brian: So we’ll start with what is market concentration. So the S&P 500, technically 400 And something names today as we stand the top to make up 14% of the index, which is a record
Ann: And that’s why? How did they calculate that?
Brian: So that’s market weight, so it’s price time shares. And so those two stocks have done fabulously well over the last decade, which we’ll get to in a second. But they’ve done so well that they’ve come up to pretty outsize positions. And even the top five names today are about 30% of the index, which means the index, again, a very popular index, and people’s portfolios is concentrated in just a few number of names, right? And so the way we look at that is it’s not, in our estimation, tremendously prudent to have two names or five names make up such a dramatic amount of someone’s portfolio,
Ann: Because we rely on diversification.
Brian: Diversification Exactly. So you know, I think the next question is sort of how did they get there, and why is it an issue moving forward? So let’s go back 10 years, go back to 2013. Those top two names, traded at 10 or 11 times price to earnings. So that’s a valuation metric. Today, as a result of just spectacular returns that I think most hopefully all of us have been able to participate in the trade. It’s a paid and they trade close to 30 times p, so dramatically different valuation today than existed 10 years ago. And you know, the why you why we are so worried about that is that that’s going to be really hard to replicate over the next 10 years. Okay. And so this is sort of us talking about our long-term focus. I think in these in these discussions, we always talk about how we’re focused on the long term. And so that’s you know, that’s that’s something we are spending a lot of time thinking about is these names which did fabulously well over the last decade. It’s going to be very hard for them to earn those type of returns, you know, 20% plus per year
Ann: Right to that trajectory, will be difficult to maintain
Brian: So it will be difficult moving forward. And yet we all are kind of exposed to it as a result of you know the concentration in these indexes and ETFs
Ann: And how’s it impacting what we do that portfolio?
Brian: Really to start this year and really last year, I’ve been looking to just be diversified. I mean, we I shouldn’t say started we’ve been we you know the ethos of what we do from an asset allocation is to be diversified, but we’ve looked at our large cap US equity exposure, so we need to kind of broaden that out because we feel there’s just better opportunities specifically from a valuation exposure in other parts of markets and not necessarily just in the US, where we’ve talked in the past about how smaller companies other industries, stocks outside the US are at historically low valuation. So kind of the reverse of where we were 10 years ago. 10 years ago, stocks outside of the US sold at a premium to the S&P 500 Now they sell at almost a 30% discount to the S&P 500. So you want to kind of be mindful when you’re building asset allocation of kind of where things stand today and how likely are they to repeat what they’ve done in the past decade in the decade to come?
Ann: So it does again highlight the need for multiple asset classes within a given portfolio and with thought given to how much percentages is given depending on what the client’s objective is or goals in their lifetime
Brian: exactly
Ann: are they already meeting income for instance, or are they aggressively growing
Brian: Diversification across strategies is of utmost importance.
Ann: Okay, Brian, thanks. I think that’s a wrap.
Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Stock investing involves risk, including loss of principal. The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
Investing in mutual funds involves risk, including possible loss of principal. Value will fluctuate with market conditions and may not achieve its investment objective.
Because of their narrow focus, investing in specialized sectors maybe subject to greater volatility and special risks than investing more broadly across many sectors and companies.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Fixed income investments are subject to credit, market, and interest rate risk if sold prior to maturity and are subject to availability and change in price. Cash alternatives are subject to various risks, such as market or credit risk, and may lose value.
Investment advice offered through Shepherd Financial Partners, LLC, a registered investment advisor. Securities offered through LPL Financial, member FINRA/SIPC. Shepherd Financial Partners and LPL Financial are separate entities.
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