By: Bill and Cindi Porter, AILERON INVESTMENT ADVISORS
Q: Is it wise to invest in the S&P 500 index?
A:Maybe. The S&P 500 is comprised of 500 large U.S. stocks which cover 11 major sectors of the economy. Although it is not possible to invest directly into the S&P 500® Index; some feel it is a representative of how the American economy is doing as a whole. But is it? Consider this: The S&P 500 was up 18% for 2020, BUT if you eliminate the top 24 companies, the remaining 476 companies as a group were negative for 2020. Tech firms carried most of the 18% average return.1
Investors can invest in all the same stock as the entire S&P 500, or instead, just one or more of the 11 individual sectors. Opting to limit an investment to only part of the S&P 500 offers more upside and downside potential. For example, in 2020 the S&P 500 Information Tech sector was up 42%, but the S&P 500 Energy sector was down 37%.2 If you limit your investment to only specific sectors, be sure you know why you are making that decision. However, if you are correct in your assumptions and pick a top performing sector, your returns will exceed the overall S&P 500 index. Of course, the reverse is also true.
Sometimes stocks are added to the S&P 500 index, which means others are removed because the index is always limited to 500 companies. In 2020, Tesla (TSLA) was added to the S&P Consumer Discretionary sector, and Apartment Investment and Management (AIV) was removed from the S&P Real Estate sector. Not only did two stocks change the S&P 500 lineup, but they also significantly altered the size of their respective sectors.3 That matters for investors who may be thinking of opting for individual sectors rather than the S&P 500 index as a whole.
Your trusted advisor can help you decide if, how, and how much you may want to invest in the S&P 500 or any of its 11 sectors.
1 – Madison Market Monitor – January 4, 2021 Madison Market Monitor 4Q 2020 (constantcontact.com)
2 – https://www.reuters.com/article/us-usa-stocks-energy/battered-energy-sector-could-get-reprieve-from- golden-cross-chart-signal-idUSKBN29421R
3 – Barron’s “S&P’s Addition of Tesla Revives Indexer Debate” December 21, 2020
This is for education only. Before using this information in any way discuss it with a financial professional. There are many risks associated with stock trading. You may lose some or all of your financial investment. Securities offered through Dempsey Lord Smith, LLC Member FINRA/SIPC. Securities offered through Integrated Financial Planning Member FINRA/SIPC. Advisory services offered through Dempsey Lord Smith, LLC. All the information in this letter is published in good faith and for general information purposes only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information is strictly at your own risk.
Send your investment questions to: [email protected].
All the information in this letter is published in good faith and for general information purposes only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information is strictly at your own risk.
