One of the more common trends Your Survival Guy sees in investment portfolios is a lack of diversification. Through the years, investors add more money to the winners while the losers are shoved to the side like misfit toys. Over time, portfolios look less like a toy box and more like a mantle of six or seven trophy stocks. That’s dangerous.
If you look at the S&P 500 today, it reminds me of that mantle or trophy case. It looks nice. Who doesn’t like a shiny trophy? But will the winning continue?
Yesterday, in a conversation with my father-in-law Dick Young we talked about diversification. “Survival Guy,” he said. “Greetings from the Key West. As we were discussing the other day, diversification is discipline. Many investors are simply not up to the task. It’s too hard to overcome inertia to make the necessary decisions.”
Later in the day, in a conversation with clients, we talked about the “magnificent seven” in the S&P 500: Seven names make up a third of its value while the other 493 only two-thirds. That’s not a level of diversification I’m comfortable with. Where’s the margin of safety? And it’s not just the S&P 500 Index funds that concern me. Look at the top 10 holdings of a lot of mutual funds or ETFs and you’ll see the same seven names.
It’s the Snow White portfolio with the same seven doing all the work. But for how long?
Portfolio managers are under tremendous pressure to keep pace with the S&P 500 or lose their jobs or their investors. If you consider the makeup of most funds, including the target maturity ones, you’ve got a lot of money in just a few names. But keeping up with the Joneses, or the Dow Jones, for that matter, is what their game is all about. This movie’s not over.
Action Line: If you need help with your trophy case, I’m here.
Originally posted on Your Survival Guy.
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