When you watch increases in the S&P 500, an index of large companies, we are curious whether the return is widespread throughout the index or concentrated.
One-third of the returns over the last 12 months came from the technology sector – quite concentrated! Digging deeper, we find that the top five in the index actually account for greater than 15% of the S&P 500.
The last time the top five companies made up in excess of 15% of the index was 2000.
While this may or may not be worrisome (it has happened in the past with other sectors), we consider this another good reason to diversify our investment approach.
While it is true that index funds tend to have lower expenses, it is also true that indexes represent a momentum strategy. This strategy assumes that the market will continue its existing upward trend. Looked at another way, since the above five stocks prices increased so much, they will continue to do so.
Nothing lasts forever. We believe it is also important to have a contrarian viewpoint to diversify thought within the portfolio. From the core of index/passive funds, add actively managed funds, buying based on the value of companies, as opposed to the crowd mentality of momentum investing.