I bet you own more than one stock in your portfolio…
After all, you can’t see the future. You don’t have a crystal ball.
If you did, you would simply invest all your money in the best-performing stock. And then, you would spend all your time doing something other than investing.
Of course, that isn’t how the real world works. We face uncertainty – and a lot of it today.
One stock won’t cut it. It could go up, down, or sideways. So as a result, we need to protect our portfolios from the uncertain future of any single company.
But there’s a problem…
Wall Street wants you to believe it has a crystal ball. And as crazy as it sounds, many investors buy it. That’s a recipe for disaster in many cases.
So today, I want to help you avoid falling into the trap of Wall Street’s crystal ball…
Last Monday, my colleague Pete Carmasino detailed a major risk for the broad market. In short, the market is too heavily weighted in one stock – tech giant Apple (AAPL).
As Pete wrote, Apple makes up roughly 7% of the S&P 500. It’s currently more than 12% of the Invesco QQQ Trust (QQQ). And it’s an incredible 22% of the Technology Select Sector SPDR Fund (XLK).
So as Pete concluded, such large allocations to Apple mean its struggles can “bring down the whole market.”
You might not realize it, but you just caught a glimpse of Wall Street’s crystal ball. It’s buried in the “boring” topic of portfolio allocation.
It’s crazy that one stock can influence the market so heavily.
And frankly, I bet every institutional investor would agree with me. Yes, even the ones on the S&P 500’s selection committee and those involved with putting together QQQ and XLK.
Those people are too smart, too educated, and too skilled to think something like that makes sense. But the thing is… they’re selling the crystal ball.
Think about it this way…
Imagine you believe equally in the potential of two companies. It would make sense to invest 50% of your money in each stock.
Now, suppose you felt twice as confident about Stock A over Stock B. Obviously, you would want to invest two-thirds of your capital in Stock A and the rest in Stock B.
But when it comes to the S&P 500’s selection committee, that isn’t what happens…
The committee doesn’t think about or choose a specific allocation. The members just look at “market capitalization weighting” and let the chips fall.
Apple’s influence on the S&P 500 has nothing to do with its investment merits or any level of risk or uncertainty. Instead, the allocation is just determined by the total dollar amount of its outstanding stock.
It’s a pretty goofy system when you stop to think about it. But hey, selling the crystal ball works – until it doesn’t. When those big stocks sell off, it leads to more chaos in the market.
Folks, you don’t have to buy it…
Be your own boss in the market for stocks. Do your own research. Draw your own conclusions.
Don’t rely on a crystal ball to manage your portfolio allocation.
Good investing,
Marc Gerstein
