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Bob Carey
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  When Less Can Potentially Bring More
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. If an investor seeks to outperform a benchmark index, such as the S&P 500 Index, one way to approach the challenge is to simply pare down the number of stocks one invests in.
  2. As indicated in the chart, over the past 11 years (includes 2008 to show impact of financial crisis), the average number of stocks in the S&P 500 Index with positive annual price-only returns (does not include dividends) was 310, or roughly 61%. That means that approximately 39% of the constituents in the index, on average, were providing a drag on returns in a given year.  
  3. Here is a link to a similar post we did in January 2013 (click here). In this snapshot (1993-2012), which used total return performance figures, the average number of stocks in the S&P 500 Index that posted a gain for the period was 61%. 
  4. One of the ways in which an investor might attempt to generate a return that exceeds that of a benchmark index is to identify and eliminate those companies most likely to end up in the red at year-end. Easier said than done.
  5. This is where professionals can add value for an investor. Financial consultants and packaged product vendors have a multitude of strategies designed to potentially outperform the broader market via less diversification.
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks (currently 505) used to measure large-cap U.S. stock market performance. 

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Posted on Tuesday, January 29, 2019 @ 2:06 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA and the Internal Revenue Code. First Trust has no knowledge of and has not been provided any information regarding any investor. Financial advisors must determine whether particular investments are appropriate for their clients. First Trust believes the financial advisor is a fiduciary, is capable of evaluating investment risks independently and is responsible for exercising independent judgment with respect to its retirement plan clients.
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