Hitting the reset button

Apologies for the delay in delivering this post. Frankly, I’ve been struggling a bit with what to do about Invest-Notes. Not for the first time my enthusiasm around writing articles has waned. And if I’m not excited about what’s being written it is unlikely readers will be excited about they are reading. October will mark ten years that I’ve penned this blog and while I debated about winding the site down, I’d honestly rather not.

The first time I struggled with “what to do different” a decision was made to not force an article every Sunday – as I did for the first few years. This change was well received by readers. The second time, a couple of years ago after my personal portfolio had migrated to exchange traded funds, I determined not to focus on stock picking but discuss the philosophy of investing. This change hasn’t worked out as well.

So thanks to my friend, and long-time Invest-Notes reader, Rick who over a glass (or two) of wine recently asked the question that originally jump-started this enterprise a decade ago, “But what should I do with my portfolio?” Valuations are high by historical standards and the world a more confusing place on so many levels. Yet we know that a major impact on our future financial status is driven by the money we have invested in both taxable and retirement accounts. Yes, the market mayhem of the dot-com bubble in 2000 and the financial crisis of 2008 represent the painful side of investing. Nonetheless those who have stayed the course – and stayed invested – have profited handsomely. Nobody ever said it was going to be easy.

In answer to Rick’s query I shared a couple of equity purchases and sales in my own accounts over the last few weeks. These included ideas for my retirement accounts, but mostly my gambling account. Long term moves for the former, short term plays for the latter (and much smaller account). The original justification for moving away from providing specific trade advice was the discomfort of talking about investment ideas that I personally never followed through on. Going forward the plan is to only talk about specific actions I have taken within the investment accounts I am responsible for. And since I don’t really trade that often, we’ll also spend some time talking about the decision making processes that lead to what account adjustments are shared here.

Which brings Invest-Notes full circle. Originally I wanted to ensure that I could explain to myself what I was doing and why. This, in turn, allowed family and friends to have access to investment ideas beyond the popular press – for better or worse. You have been warned.

Now we’re coming up to the end of the first half of 2017. It has been a very profitable ride in most market sectors and the BIG question is can it continue. While I can’t answer that question, there’s a couple of ways to think about what to do next if, like me, you make quarterly purchases in retirement accounts.

So far in 2017 just ten stocks account for almost 50% of the gains in the S&P 500. Now, the S&P is “cap weighted” meaning that the more valuable a company is, the bigger proportion it occupies within the index. For example, Apple (AAPL) is the biggest company on earth, so it receives the largest “weighting” of the 500 stocks in the index. Currently, AAPL is over 3.5% of the total of the index. By contrast, Exxon is 1.5% of the index and Home Depot is less than 1%. If the index was not “cap weighted” then no stock would comprise more than 0.25% of index value. This simply means that when AAPL goes up or down it has a much bigger impact on the value of the index than other stocks. This is reflected in the price of S&P 500 exchange traded funds like VOO and SPY, two of the largest ETFs available.

To sum up the paragraph above, the top four holdings in the S&P 500 index are Apple, Microsoft, Amazon and Facebook. These four stocks account for 10% of the total value of the entire index. The S&P is up around 9% year-to-date, while the Dow Jones Index is only up about 7%. But then the DJI does not include Amazon or Facebook, both up about 35% so far this year. Now, at some point, the rocket ride will end. Maybe these four stocks simply quit shooting higher, or maybe they peak and their stock prices drop? Either way the impact on the S&P will be to deliver an underperformance with an outsized impact on the entire index.

Around the end of June, or first part of July, I’ll make an addition to my holdings of S&P 500 index funds in retirement accounts. That addition will be the Guggenheim S&P 500 Equal Weight ETF (RSP) where none of the 500 stocks makes up more than 0.25% of the total index value. When, not if, a market correction occurs, the high-flyers tend to fall furthest. Twenty-five percent of my retirement accounts are in VOO and RSP. While VOO is my largest single holding, RSP is quickly catching up.

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