It’s no secret that the biggest names in the stock market today have been responsible for the majority of gains so far in 2024.
As a result, many investors I’ve talked to recently have complained about their portfolio returns.
Those greedy sons of guns… was my first thought.
But then I took a step back and thought about why this might be happening.
I asked these folks about the stocks that made up their portfolio. Most had exposure to the broad stock market indices. But they were also attempting to be full-time stock pickers – with investments in an assortment of individual stocks to complement their mutual funds and exchange-traded funds (ETFs.)
There’s nothing wrong with that balance. But it explained why they weren’t experiencing the same strength as the broad market.
Through this weekend, the S&P 500 Index is up 15% so far in 2024 while the S&P 500 Equal Weight Index has gained just 5%. Last year, the S&P 500 beat the Equal Weight Index by 12%
This is important because the S&P 500 Equal Weight Index rebalances every quarter to give every stock an equal weighting. Meanwhile, the S&P 500 is weighted by market cap – or the size of the individual company. For example, Nvidia (NVDA), Microsoft (MSFT), and Apple (AAPL) make up more than 21% of the index and the remaining 497 stocks account for 79%.
That should tell you why your portfolio isn’t keeping up with the S&P 500.
If your portfolio is underweight the big five to 10 U.S. tech stocks, it’s highly likely that you’re not reaping the same rewards as the broad market.
The knee-jerk reaction to addressing that problem would be to rebalance your portfolio and increase your exposure to the big tech names. That could work. But history tells us that when the S&P 500 outperforms the S&P 500 Equal Weight Index, it’s often followed by a reversion to the mean.
In other words, the laggards will become the outperformers in the coming years.
Longtime readers know that I’m incredibly bullish on the stock market over the long term. Of course, nothing goes straight up. But I expect the bull market to continue.
That’s why I regularly put money into the Invesco S&P 500 Equal Weight ETF (RSP) in my retirement account.
My career may be centered around finding individual stocks that outperform the broad market. But I will always keep a portion of my portfolio in what I call “core” investments. Right now, that portion is in the Equal Weight Index.
It might be worth considering a similar approach in your personal portfolio.
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