I would be surprised if the average investor understands how major securities indices are composed.
Take the S&P 500, for example. It’s a market cap weighted index. What’s a market cap, and how is it calculated? It’s surprising to me how little attention this gets.
Market capitalization is the value of all the shares of a company added together. The market cap of the S&P 500 is the value of all the shares of all five hundred companies added together.
The companies with the biggest market caps themselves, therefore, make up a bigger part of the index’s market cap. So, when you look at the S&P 500, it’s the biggest companies that stir the drink.
The so-called Magnificent Seven account for around a third of the market cap vs. two-thirds for the remaining 473 companies. How’s that for diversity?
You know how Your Survival Guy feels about price. And market caps are just a function of prices. They’re opinions. And opinions change. What if it turns out today’s prices/opinions are wrong? Like diversity, equity, and inclusion (DEI), sometimes the emperor has no clothes. Opinions come and go.
Your Survival Guy’s DEI? Diversify equities immediately. That’s an acronym I can live with.
Action Line: I believe in you. Let’s talk.
Originally posted on Your Survival Guy.
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