For the fifth straight week, the markets were up, with the S&P 500 passing the 5,000 mark for the first time. One of our concerns with the growth of the S&P remains the outperformance of the so-called Magnificent 7, seven large technology companies whose stock prices more than doubled last year, largely driven by their association with artificial intelligence technology. While these are certainly profitable companies, if your goal is to buy low and sell high, I think a reasonable person would have to ask if now is the time to buy more of these companies.
As of January 9, the forward price to earnings ratio, or the price of the stock compared to the expected earnings per share, was more than double for the Magnificent 7 compared to the rest of the S&P 500. In other words, investors purchasing these companies think they will generate more than twice as much profit as the other 493 companies in the index.
Further complicating things is that the S&P 500 is a cap-weighted index. It’s not the share price of 500 stocks totaled up and divided by 500. It’s the total value of all of the outstanding shares of each company added together and divided by 500. If you’re just buying an index fund, you could have a much higher concentration of those seven stocks than you think. In fact, some S&P 500 index funds have over 40% of their holdings in just those 7 stocks.
The index’s overconcentration in technology and communication services means that the index, meant to be a broadly diversified group of large US companies, is instead subject to the risks inherent in one industry. Adding in value, or dividend paying stocks, may help diversify the risk level in your portfolio.
Beyond that, it’s important to remember that the end goal is not a dollar amount, or the best return. The end goal is the lifestyle your money enables. Can you send your children to college, or help your grandchildren? Can you comfortably retire, and maintain your current standard of living? Can you afford to stay at home as you age and need assistance? Will your family be okay if you pass away prematurely? We would argue that those goals are where your focus should be, and your portfolio should be aligned with your goals.
Your action item this week is to check your Social Security statement at ssa.gov. Be certain your annual salary has been reported correctly, and then join us for our webinar on February 26th to learn more.
Be sure to check out our website at covingtonalsina.com, or our Facebook page, for more information and resources.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.