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| Another view on the S&P 500 index | ||
By Patrick Coyne Published October 1998
|
Mr. Giordano makes an excellent
point and his facts are correct. However, he is incorrect that no one would
intentionally invest 77 times more in General Electric than in Great Lakes Chemical. Secondly, he ignores a major reason that, in my opinion, the S&P 500 index is rising so quickly. On the first point, if we lump all investors together, they are, by Mr. Giordano's own figures, investing 77 times more in General Electric than in Great Lakes Chemical. Likewise, many of my clients own a hugely disproportionate percentage of Microsoft because of its huge gains over the last decade. I urge diversification, but it is difficult to convince someone to dump an historic winner that still looks like a winner for years to come. The "capitalization-weighted" approach more accurately reflects the average portfolio as it exists today but Mr. Giordano compares it to the average new investor's initial allocations. This is comparing apples to oranges. On the second point, in years past, most of the new money invested in the stock markets was either from experienced investors or through experienced brokers. In recent years more and more new money is being placed into the markets by neophytes. The average neophyte investing his 401(k) contributions has heard the hype regarding index investing and the S&P 500 that Mr. Giordano refers to. The name recognition enjoyed by the S&P 500 attracts a disproportionate share of the new money being invested. This disproportionate share of new money is causing, therefore, a disproportionate rise in the S&P 500 Index. The dilemma for investors now is whether to invest for the distant future, as Mr. Giordano suggests, or for the immediate future. As a professional investment advisor, I agree with Mr. Giordano that we should invest for the long term. The reality is, however, that neophyte money will frequently go toward short-term goals. The dilemma for advisors: If we accept as fact that the S&P 500 will continue to rise as long as the amount of new neophyte money entering the market is increasing and being disproportionately invested into the Index, are we doing a service or disservice to our clients by steering them away from the S&P 500 Index? At some point, the self-fulfilling prophesy of the S&P 500 will reverse as the amount of new neophyte money available begins to level off, then decrease. The resulting effect on the S&P 500 Index will cause many existing investors to pull out of the Index, thereby magnifying the impact. Personally, I am choosing to avoid the Greater-Fool Strategy and following a course, for my clients and myself, which should be acceptable to Mr. Giordano. |
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