Like the S&P 500 Index?

Maybe you should look under the hood.

Jim Lorenzen, CFP®, AIF®

Like indexing?  Like the S&P?  You can get an index fund!  Sounds good.  Let’s face it, most (virtually all) investment management companies fail to beat the S&P index on a consistent basis.  We all know that.

There’s a good reason for it:  An index doesn’t have expenses while, in the real world, all assets have a cost of ownership – expenses – attached.

If your home is worth $500,000 and your local housing market, including your home, increased by 10%, your home and the market would become worth $550,000.  Did you tie the housing index?  Of course not.  You had to pay property taxes, homeowner’s insurance, maintenance and repair costs, mortgage interest, maybe even HOA and other costs that are required.   Sometime, just for fun, add up all your annual costs and see what your annual expense ratio is (total costs of ownership divided by your home’s current value).  You might be surprised, but I digress.

Expenses aside, how about using a fund replicating the S&P index (that’s as close as you’ll get)?  Let’s look under the hood.

According to Craig L. Israelsen, PhD, an Executive-in-Residence in the Personal Financial Planning program in the Woodbury School of Business at Utah Valley University, if all holdings in the index were weighted equally, each company holding would have a fixed weight of about 0.20% in the index.  However, the holdings aren’t weighted equally; their weighted according to their market capitalization.  This means that roughly 42% of the assets in a market cap-weighted S&P index are held in just 25 of the 500 stocks – another way of saying that the largest 5% of stocks represent over 40% of the allocation.

The practical implication of all this:  half the stocks in the market cap-weighted S&P index have very little impact on performance.

When tech goes up, the cap-weighted S&P index looks good.  When tech takes a nose-dive, not so good.

Is that good for baby-boomers now guarding their serious money for retirement?  Saving a point or two on investment expenses may not be the key issue for this group.  Wealth preservation and maintaining purchasing power for the long term may be more important.

Maybe there’s a better way to achieve long-term goals than riding the index roller coaster.



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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.