The Standard & Poor’s 500 is an index of 500 top companies in leading industries of the US Economy. It is widely regarded as a better indication of US market performance than the Dow Jones Industrial Average, which is made up of just 30 companies.. The S&P 500 was introduced in 1923 and took on its present form in 1957. It was developed and is maintained by S&P Dow Jones Indices, a joint venture majority owned by McGraw Hill Financial. It is managed by a 9 member committee of S&P Dow Jones Indices economists and index analysts. Just think how powerful the committee and its members are!
To be included on the S& P 500
a company must be a U S company and meet criteria including size which is known as market capitalization, minimum monthly trading volume, liquidity and sector classification. The goal is to include companies in industries that mirror the US Economy. Companies’ shares in the S&P 500 are weighted by market capitalization, which means larger companies receive a greater weight than smaller companies. In other words, not all companies make up an equal percentage of the index.
Many investors view the S&P 500 as a passive or fixed index with few changes. In fact there is a lot of turnover or activity in the index with companies added and deleted frequently. Companies can be deleted due benign consequences such as mergers or reincorporating outside of the use. Interestingly enough, companies can also be deleted due to having substantial declines in their market values. Business Insider recently published an article called: Since 1980, The S&P Has Dumped 320 Stock Because They Stunk. According to market analyst, Walter Deemer, “the additions and deletions to the index generated a significant increase in the index’s- and, by extension, “the market’s”-performance.
What does this mean to investors?
1) It is hard to beat. If you are comfortable with the ups and downs of the financial markets you may want to own investment companies that seek to duplicate the S&P 500. It is nearly impossible for an individual investor to duplicate on their own because you would have to invest in 500 companies and have the correct weightings in each and buy and sell as the underlying companies in the index change per the committee decisions. Or investors can look for companies that have done as well or even better over long periods of time.
2) Use the S&P as guideline or comparison. My last column I talked about avoiding the worst sectors or industries. One way to do that is by developing a sell discipline by comparing how companies in different industries are doing compared with the S&P 500 over various periods of time. If a sector isn’t performing as well, sell any companies in that sector. One investor I was visiting with recently said, “If I own a company and it isn’t doing as well as the S&P, I get rid of it”.
3) The S&P 500 is one of the most popular benchmarks against which investors’ measure or compare themselves. At Vision Wealth Management, Inc. we work with you to determine the best benchmarks for you personally along with the correct mix of fixed income to equites based on your risk tolerance, time horizon and comfort level
At Vision Wealth Management we are continually investing time in acquiring more knowledge and information for you because as Benjamin Franklin said, “An investment in knowledge always pays the best interest.”
Marcy Haines CFP® is the president of Vision Wealth Management, Inc. in Baker City and a Registered Principal with, and securities are offered through, LPL Financial. Member FIN
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