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Stock Market Beauty Contest: Part II

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You know from Part I that this stock market is a beauty contest. Five companies account for two-thirds of the returns year-to-date for the S&P 500 Index. They are: Apple, Google, Microsoft, Facebook, and Amazon.

It has been my experience that investors make the grave mistake of confusing index investing with diversification.

Owning the S&P 500 does not mean you’re diversified.

Owning the S&P 500 means you own a market-cap weighted index of stocks where the companies with the largest market-cap have the most influence over its direction.

Like sheep heading to slaughter, investors continue to pile into index funds with false confidence: “Hey, Jack Bogle and Warren Buffet recommended it, what could go wrong?”

The Vanguard Group is the largest provider of index-tracking products. I love Vanguard. It has pulled in $196 billion of investor cash through October. It is on pace to beat last year’s record haul of $216 billion. But, right now, I would never own the Vaunguard 500 Index.

Life is good while the money train keeps chugging along. But let’s not confuse indexing with diversification. This stock market is a beauty contest and the bulk of this train consists of only five cars.

fab five

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.
E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.