What is going on with DJIA and S&P 500?

Blog post #459

We believe it is important that you understand how the S&P 500 Index works, the concentration that exists in the technology sector and among the top 5-10 stocks. The S&P 500 has not been this concentrated in any one sector in over 70 years. While the overall Index was up about 5% year to date through July 31, 2020 due to the performance of the top 5 stocks, the remaining 495 stocks were down about (6%) for 2020.

The S&P 500 Index is a widely tracked index, composed of generally the 500 largest public companies which are based in the US. The stocks in the Index change over time, as companies are bought, merge, grow and shrink. A company must be profitable to be added to the Index.

The S&P 500 Index has frequently been concentrated in the past but has become very concentrated in just the technology sector in recent years. The top 5 stocks comprise over 22% of the Index as of July 31, 2020. That is now likely to be 25% or more.  Information technology as a sector is now between 25% – 30% of the S&P 500 Index, as the chart below shows:


The S&P 500 is a market-weighted index, meaning that the market value (share price x number of shares outstanding) of the largest companies have the greatest impact on the index’ performance.

As of July 31, 2020, the following are the top S&P 500 stocks and their respective weightings:


Apple 6.40%
Microsoft 5.75%
Amazon 4.90%
Facebook 2.26%
Alphabet/Google 3.26% (A and C shares)


Apple, Microsoft and Amazon, because of their huge market valuation, have a much, much greater impact on the rise and fall of the Index than other companies. Apple’s price change has almost 6X greater impact than Visa, the 10th largest stock, (1.18% as of 7/31/20).

Two examples of large companies, but with much less impact on the Index’ performance would be:

  • Netflix, 22nd largest, but only a 0.781% weighting
  • Costco, 41st largest, but only a 0.522% weighting (as of 6/30/20).

It is widely believed that Tesla will be added to the S&P 500 in the near future. This may have a dramatic impact on the performance of the S&P 500 Index. To be eligible to be added to the S&P 500, a company must be profitable for four straight quarters. Tesla this reached profitability as of June 30th, primarily due to the sale of energy credits, not its core car making business.

Tesla has a market valuation of $400 billion, which exceeds that of Walmart, which is valued at $370 billion. It is rare that a company with a market cap as high as Tesla would initially be added to the S&P 500. Normally, a company with such a massive market cap would have been profitable much earlier and added to the Index before it became so large.

One measure of a company’s relative price valuation is called the P/E ratio, or Price/Earnings ratio. Generally, the higher the number, the more future growth is expected. A very high PE ratio is also viewed as a sign of greater risk. The overall S&P 500 Index currently has a PE ratio of around 24.Tesla currently has a PE ratio of greater than 1,100. Walmart has a PE ratio of 21. 

If Tesla is added to the S&P 500, it would be in the top 10-15 stocks. Tesla’s market cap of $400 billion would be just below the $461 billion market valuation of Visa (both values as of 8/26/20), which is the 10th largest company as of 7/31/20, at 1.18% of the Index. Thus, Tesla would carry a lot of weight in the Index, and it has been a very volatile stock. Tesla has experienced an incredible rise since June 2019. It has also had other periods of huge and fast declines. If it is added to the S&P 500 Index, Tesla would likely add a lot of volatility to this widely tracked index. 

I wrote a post in January 2018, explaining that only 5 stocks caused over 50% of the 2017 DJIA increase (Boeing, Caterpillar, UnitedHealth Group, 3M Co and The Home Depot). Please see this post, 5,000, 30, 5 and 2, for further information. The impact of the top 5 stocks on the S&P 500 Index and this example of the DJIA are why we stress that our broadly diversified portfolios will often act differently than these major market indices. We believe that broad diversification, and not just holding large growth companies, are important in the long-term.

Our goal for nearly all of our clients is to help you reach your financial goals, while taking an appropriate manner of risk. Thus, we feel it is in your best financial interest to own the S&P 500, but only as a portion of your overall portfolio. Historically, over the long term, a globally diversified portfolio has outperformed the S&P 500. This will certainly not be the case every year, or possibly for years at a time. And that is why investing requires discipline and an understanding of how markets and indices work.

Major impact: It is important to note that over $11 trillion dollars track the S&P 500 Index as of the end of 2019. Thus, changes to its composition and the weightings of the top stocks have major market impacts. While the DJIA is widely cited by the press, only about $31 billion in assets actually track the Dow, so the changes discussed below don’t lead to an immediate shift in investor behavior.

Apple stock split causing changes to the Dow

The Dow Jones Industrial Average (DJIA) is quite different than the S&P 500. The DJIA consists of only 30 stocks. The DJIA index is calculated in an unusual method, which emphasizes the actual price change of the highest priced stocks in the index. The Dow is a price-weighted index, meaning higher-priced stocks contribute more points to the index’s daily moves. It is not based on the percentage change of each company and the companies are not equally weighted. 

Apple stock is around $500 per share. Apple is currently the highest price stock of the 30 Dow components, meaning that Apple’s price changes exert the most influence on the DJIA. However, next Monday Apple stock is being split of 4 to 1. This means that each Apple shareholder will receive 3 additional shares and the price will drop to around $125 per share, if the price does not change.

Thus, because of its price per share reduction, Apple will go from being the largest DJIA influencer to middle of the pack, as its approximate $125 share price would be in the middle of the 30 stocks in the Dow. The stock split will have no impact on Apple’s large influence on the S&P 500 Index, as the market capitalization of Apple is not affected by the stock split. United Health Group ($308 per share) will now be the highest price stock in the Dow, and its biggest influencer.

As a result of the Apple stock split, and the change to Apple’s stock price, Dow Jones is adding and deleting stocks to the DJIA, and will modify the divisor that it uses to calculate the DJIA, effective Monday August 31. The changes and prices of each, as of end of business day, 8/26/20:

Being Added to DJIA:

Salesforce.com $272 (increase from $216 a few days ago), technology
Amgen $250, biopharmaceutical
Honeywell $165, industrial

Being Deleted to DJIA:

Exxon $40, energy
Pfizer $38, pharmaceutical
Raytheon Technologies $61, defense and industrial

S&P Dow Jones Indices, which manages the benchmark, is adding Salesforce to add another technology component, as Apple’s influence will be less in the future. They are swapping two large pharmaceutical companies, likely to get a faster growing company and one with a higher price, in Amgen. Each company being added have high stock prices, so each will have significant impact on its daily movements.  Actually, each newly added company will have more influence on the Dow than Apple will, for now.

Deleting Exxon from the DJIA tracks the reduction of the energy sector in the broader economy. Exxon was the longest lasting member of the DJIA, first added in 1928. This leaves Chevron as the only energy company in the Dow, with just 2.1% of the price-weighted index. At the end of 2011, energy was 12% of the S&P 500. Energy is now only about 2.5% of the S&P 500, the smallest of the 11 industry sectors. Exxon and Raytheon were down at least 30% on the year, so this is a way to potentially add “better performers” to the DJIA.

The Dow and S&P 500 Index, though very different based on composition, number of components and how each is calculated, have behaved similarly over long periods of time. This year has been different, as the S&P 500 was up over 6% for the year as of a few days ago, while the DJIA was down about (1%) for 2020.

We feel that one of our roles is to provide you with helpful and timely information, so you can understand certain financial matters. As the S&P 500 Index and DJIA are mentioned in the press often, we thought this explanation would be beneficial, as well as inform you how concentrated the S&P 500 is in just a handful of technology stocks.


1. “Salesforce, Amgen, Honeywell to Join Dow Jones Industrial Average“, The Wall Street Journal, by: Michael Wursthorn, August 24, 2020
2. “Exxon’s Departure From Dow Highlights Market’s Retreat From Energy Bets“, The Wall Street Journal, by: Karen Langley, August 25, 2020

Beyond Investing….You Get More

Blog post #458

You must make many financial decisions during your life.

Some of these decisions are straightforward.

But many financial decisions or issues can be complex. Often, you may lack adequate information or the specialized skills necessary to make a fully informed decision. There is uncertainty. Laws changes. The financial markets and the world changes.

At what age should you begin to collect Social Security benefits? 62? 65 or 66? Or wait until age 70?

For many decisions and issues, there may not be one, perfect answer. Reaching a decision may depend on various facts, circumstances, judgments and assumptions.

In many cases, these types of decisions can be overwhelming. What you desire to be a rational, logical decision may really be partly an emotional decision. Or it may be an emotional issue, but you want to make a rational decision.

Should you pay off your mortgage early? Should you refinance from a 30-year mortgage to a 15-year mortgage?

When you first became a client, or if you are a prospective client, you most likely come to our firm because you want investment guidance and advice. And we will provide you with that.

Over time, most of our clients come to realize that we can provide you with far more than just investing advice. We help you find solutions to your other financially related issues, questions and concerns.

Our relationship usually begins with planning around investments. What is an appropriate allocation to stocks, based on your family’s goals and needs? Do you need to take more or less risk to meet your various goals? How should your investments be structured for the short and long term?

But at some point in the future…..questions arise…….

Do you need to have life insurance? What kind? Whole life or term life insurance? How much is necessary and what is most cost effective?

Later in life, you may ask if life insurance is even still necessary.

One of the most satisfying aspects of the relationships we have with our clients is to assist them with all these financially related issues. We have decades of financial experience, which you benefit from. Brad and Keith are both CPAs, with over 70 years of combined financially related client experiences. Our Associate Wealth Advisor, Bradford Newsome, is a Certified Financial Planner with over 10 years of helping clients with all kinds of financial matters. We also have resources and access to top financial planning experts within our back-office firm and others, to help work through these issues.

We want to help you. We strive to provide you with much more than just investment advice.

Should you have a long-term care policy? Does it make sense for you and your family?

What is the best way to fund a college education?

How should we save for retirement? How much do we need to save? How do we pick between all the 401(k) choices?

One of the most important roles that we can provide as your advisor is to help you deal with these issues. We can help you with matters which are frequently emotional or complex, so that you can make decisions more rationally.

Throughout our relationship, we encourage you to talk to us about financial issues that are important to you and your family, beyond just your investments.

We provide you with guidance, so you can meet your goals, deal with uncertainty and have a greater sense of comfort and security. We can provide you with guidance, to help you make better decisions. We can teach and explain things to you in an understandable manner. We can save you time and help you to be more organized. We can help you deal with financial complexity, so you can focus on other things that matter to you.

It all starts with a conversation and a good relationship. We are ready to talk with you.

The Importance of Knowing What You Invest In….and Why

Blog post #457

We are very particular about what we invest in and recommend on your behalf, for good reason. Your financial future depends on these decisions.

We developed a philosophy when we began our firm in 2003. We still stick to that same general set of principles and criteria today. We feel that our philosophy has withstood the test of time, through some good as well as some very challenging times.

We utilize low cost investments, not products. We do not use investments that charge commissions or have front or back end loads. 

We know that fees matter. Generally, the lower the fees, the better your returns should be. There is extensive research that shows that in mutual funds, better long-term returns are correlated with lower costs. Thus, we strive to utilize funds that have good long-term investment records, as well as much lower costs (internal expense ratios) than industry averages.

We assume you want your doctor to give you the best medical advice possible, in an unbiased manner. You would not want to get your medical advice from a pharmaceutical sales rep, who can only sell a drug that their firm manufactures. The same goes with your financial advice. You want independent, unbiased advice that is in your best interest.

We try to provide advice and develop an investment plan that solves your needs. We are only compensated by the advisory fee that you pay us. We do not get any additional compensation from any investment that is in your portfolio. We are fiduciaries. This means that we must always put your interests ahead of ours.

We invest in stock and bond mutual funds or ETFs that are readily liquid, so you can access your money when you want or need it. We do not invest in products or alternative investments that restrict your liquidity for a period of years or you can only withdrawal a certain percentage of your assets each quarter or year. We feel that for nearly all our clients, these illiquid investments are not in your best interest. We want you to be confident and comfortable that you can get access to your money when you want to.

We want to be able to understand what we recommend….and be able to explain it very clearly to you, so you can also understand it. We want the funds that we recommend to you to invest in what they say they will and stick to that.  As we design your portfolio, we want the investments that we use to adhere to their stated objectives and asset class categories.

The mutual funds and ETFs that we use and recommend adhere to defined strategies, that are understandable. For example, if we recommend a US Small Cap mutual fund, that means that the fund will own the smallest companies that are publicly traded in the US. If smaller companies are underperforming larger companies in the US, this fund should be underperforming a US Large Cap fund. We can understand this and we can explain it to you. It is logical and rationale.

If we invest in a US Small Cap Value fund, we do not want a significant portion of that fund to be invested in large or mid-size growth companies, as the fund would then have different risk and return expectations.

We do not believe in utilizing alternative investments and hedge funds, because they do not meet many of these criteria. They are usually quite expensive, meaning their internal costs are usually way above 1% or 2% annually.  For the greater costs, we cannot determine in advance that their returns will make this higher cost beneficial.  The funds and ETFs that we recommend have expense ratios that are far below 1%, almost always well below 0.5% annually.

Alternatives and hedge funds can be like black boxes, as they may not provide current information on what they are invested in.  Their holdings and strategies may change frequently, so we cannot understand what they are doing.  Some alternatives use margin or leverage, which can significantly increase the risk of the investment.  We do not invest in funds that use margin in their ordinary course of operations.

After evaluating many alternative investments, we have chosen not to recommend any as of now. We do not believe that the stated goals and objectives (and their actual performance) provide you, our clients, with better expected and actual returns, after their fees. While they strive to provide greater diversification benefits, we are comfortable that we can provide you with broadly diversified stock and fixed income portfolios in a more effective and transparent manner.

We also have specific and disciplined criteria for purchasing and holding individual fixed income securities. Our goal for the fixed income portion of your portfolio is to provide safety and return of your principal, with whatever interest rate can be safely obtained for a given length of maturity. We do not believe in reaching for extra yield, for riskier bonds. We avoid certain sectors of corporate or municipal bonds, which evidence shows have greater default risk. We only purchase investment grade individual bonds or bond funds. For municipal investments, they must be very high quality and only in certain sectors and states.

We hope that understanding what we invest in, and what we avoid, makes you feel more confident and comfortable with our long-term investment strategy and philosophy.

Talk to us. We want to help you, and your family, deal with change, today and tomorrow.

Where do we go from here?

Blog post #456

It’s early August, 2020. In the US, this marks the beginning of the 6th month of dealing with Covid-19, which really started to impact the US in March.

What are we thinking about in terms of investing and financial planning now, and going forward?

What are the lessons of the past 6 months and how should we apply them moving forward?

Markets react quickly and unexpectedly: Stock markets in the US and globally reacted quickly as countries shut down due to the pandemic. Then, unexpectedly, beginning in late March, markets recovered strongly.  Investors looked at the longer term view of recovery and how companies can adapt. However, companies and sectors that continue to be greatly affected by Covid-related challenges are still far off their pre-Covid price levels.

Stick to your asset allocation and financial plan: The rapid recovery of many stocks re-emphasizes why it is so difficult to time and predict the stock market. This is why we are strong believers in developing a long-term financial plan and adhering to that asset allocation.

We work with you to develop a financial plan, based on your goals, your need to take risk and your time frame. We don’t try to time the markets and we don’t base our advice on guesses and predictions.

There is still a long way to go: While there has been great progress in Covid treatments and initial vaccine development, a return to pre-Covid life is still likely to be many months, if not a year or two or even more into the future.

There is no way to know how long vaccine trials will take. We don’t know how many of the potential vaccines will be successful. Even when some are determined to be viable, distribution and receiving vaccines will take time, likely much longer than many now realize. And no one knows how effective any new vaccines will be.

Because of all these medical unknowns, we think it is important for each of us to be realistic and develop a long-term mentality related to this new Covid environment. We need to be resilient. How can you better adjust and adapt? As Covid issues will likely be with us for awhile, are there additional things that you can or should do, to help you and your family cope with this new world?

Is there anything you want to discuss with us, to help you cope?

How your investments will adapt: We focus on developing a very broadly diversified investment portfolio for you, as part of your investment plan. Even more today, we think being very diversified is vital and beneficial.

Your portfolio has growth and value companies, as well as large and small companies. We recommend investments both in the US and Internationally. Diversification, both in stocks and your fixed income holdings, has many benefits. The most important benefit is that you should not be materially impacted by any one industry or company.

As Covid continues in the future, we do not know which countries or companies may be more successful than others. Thus, broadly diversify. As my wife asked the other night during a walk, what will happen to stocks and companies that have hugely benefitted from Covid? Won’t they go down at some point? Will they be considered way overvalued in the future, as Covid is dealt with? We don’t know the answers, which is why a broadly diversified portfolio holds all types of companies, in varying amounts.

No company, industry or geographic region should cause a decline in your retirement lifestyle or your ability to reach your financial goals. Broad diversification provides this.

We want to stress the importance of thinking long-term, even though that means different things, depending on your age.

If you are in your 20s, 30s, 40s, or 50s, you have a very long life expectancy. You should not be focused on what is happening in the markets now. You should primarily focus on saving and investing. That is what I have done and will continue to do, regardless of what the markets are doing. I keep investing, every month, into the same funds and investments we recommend to our clients.

You need to have a positive mental attitude that our country and companies, both in the US and globally, will continue to evolve, grow, adapt and succeed. I believe that years and decades from now, the earnings of public companies will be greater than today, as the world and economies expand. I don’t know which stocks will be the best performers decades from now, which is why we believe in asset class investing as a core principle.

We are concerned about the impact of Covid on small businesses, industries and people that have been greatly affected by Covid, but that does not influence the long-term investment strategy of either our firm or me personally.

As you near or are in retirement, we stress the concept of a “fixed income foundation.” By this we mean that our goal for you is to have many years of your annual withdrawal needs in various fixed income investments, such as bonds, CDs, bond funds or cash.

For example, if you have $1 million of your $2 million portfolio in fixed income investments, and you withdraw $50,000 annually, you have a fixed income foundation of 20 years worth of withdrawals ($1 million divided by $50,000 = 20) and that assumes no interest on the fixed income.

If you have have many years of a fixed income foundation, then mentally we hope that you can focus on that, as your standard of living is not directly impacted by short term declines in the stock market.

Remember, regardless of how old you are, declines in a broadly diversified stock portfolio are temporary, and eventually give way to a more permanent uptrend in the growth of stock prices.

The harder concept for people to grasp, due to human nature, is that lower stock prices mean better value for stocks going forward. It is like a sale at a store (or online!). The store sales seem like a good bargain. Try to think of temporary stock declines like a sale at a store.

We see that periods of market turbulence or stock price declines cause great companies to react, adapt, adjust and add value for the long term. The companies that will succeed will figure out a way to do so, however they are able.

This is why we invest in all types of companies, because you can’t predict who and how they will succeed, and which will have better future stock market returns. For example, while growth companies have excelled, many companies that are now considered value companies trade at a fraction of growth companies’ valuations. Many of today’s cheap companies will succeed, and they will likely have strong stock market returns when we look back, 5 or 10 years from now.

Plan for the future.

Be resilient.

Be positive.

Wear a mask.