The S&P 500 Index is more concentrated now than ever; Certain healthy behaviors can help those at risk for dementia; Why I'm glad I got a calcium score test
1) For my entire investing career over two-plus decades, my default investment advice for long-term assets has been the same as Warren Buffett's...
As he said in Berkshire Hathaway's (BRK-B) annual letter in 2016, simply buy "a low-cost S&P 500 index fund."
Well, today, I want to tweak that advice. Allow me to explain...
Buffett and I were talking about a market-cap-weighted index fund. That means the fund's return is mostly driven by the companies with the largest market capitalizations.
Take Nvidia (NVDA), for example. It's the largest company in the S&P 500 Index with a $4.4 trillion market cap.
In a weighted fund, it has around 1,000 times the impact of Enphase Energy (ENPH), the smallest company in the index (as of yesterday) with a $4.3 billion market cap.
But there's such a thing as an equal-weight S&P 500 index fund. This type of fund holds the exact same stocks, but each one is given the same weight.
That way, the largest companies don't dominate overall returns. NVDA doubling, or getting cut in half, would have the same impact as ENPH making the same moves.
In the chart below, you can see the 10-year performance of the Vanguard S&P 500 Fund (VOO) and the Invesco S&P 500 Equal Weight Fund (RSP):
The traditional market-cap-weighted fund has done better, especially in the past two years. This is because mega-cap stocks like the Magnificent Seven have done so well, pushing the overall return higher.
But as a result, the S&P 500 is more concentrated than it has ever been. And that's by a range of measures...
This chart, courtesy of Charlie Bilello on social platform X, shows that the two largest stocks account for 15.4% of the S&P 500:
And the top 10 stocks account for more than 40% of the index, as this chart from Charles Schwab's (SCHW) Kevin Gordon shows:
The chart below from the Kobeissi Letter shows that tech and tech-related stocks now account for 55% of the entire stock market. That's even higher than the peak of the Internet bubble in early 2000.
Meanwhile, the share of defensive stocks has fallen to an all-time low around 17%:
In light of such extreme concentration, the Wall Street Journal's Spencer Jakab recommends diversifying into smaller stocks:
Bypassing Nvidia and the rest of the Magnificent Seven right now could leave you with bragging rights – and more money – if you believe history is at least a rough guide to the future. Extreme levels of market concentration can signal lopsided returns for a portfolio that specifically avoids market leaders.
Jakab links to a study that highlights this opportunity: It found that "the gap between the market weight of the top 10 U.S. stocks and their contribution to the top 500 stocks' earnings was near the widest it had been in half a century."
I think there are two takeaways from this...
First, look for stocks outside of tech, and the Magnificent Seven in particular. (Though I still think Alphabet (GOOGL), Meta Platforms (META), and Amazon (AMZN) will outperform, as I've detailed in many e-mails.)
Second, while I'm not sure I'd run out and sell all of my market-cap-weighted index funds and switch to equal weighted... I would certainly allocate new money to the latter until they were balanced.
2) The "big four" health risks as we age are heart disease, cancer, diabetes, and dementia. And I'm most worried about that last one...
But I was heartened to read this recent New York Times article about how certain healthy behaviors lead to cognitive benefits for those at risk for dementia:
A combination of healthy activities including exercise, nutritious diet, computer brain games and socializing can improve cognitive performance in people at risk for dementia, according to a large new study...
"It confirms that paying attention to things like physical activity and vascular risk factors and diet are all really important ways to maintain brain health," said Dr. Kristine Yaffe, an expert in cognitive aging at the University of California, San Francisco, who was not involved in the study.
3) The other health risk I face relates to the high levels of plaque in my arteries, as I talked about last April.
My calcium test score was 365... while my wife Susan's score was a perfect zero!
The plaque buildup was due to genetic high LDL cholesterol (the bad kind), not a poor diet or lack of exercise. So after more tests, my cardiologist put me on baby aspirin, a statin drug, and an injectable monoclonal antibody drug.
The results have been amazing: In less than a year, my LDL level plunged from 116 to 37!
This recent NYT article explains how this calcium test is especially important for asymptomatic patients who have never had a heart attack or stroke:
Her doctor explained that a coronary artery calcium test, something Ms. Hollander had never heard of, could provide a more precise estimate of her risk of atherosclerotic heart disease. A brief and painless CT scan, it would indicate whether the fatty deposits called plaque were developing in the arteries leading to her heart.
When plaque ruptures, it can cause clots that block blood flow and trigger heart attacks. The scan would help determine whether Ms. Hollander would benefit from taking a statin, which could reduce plaque and prevent more from forming.
So should you run out and get a calcium score test?
As I concluded last year, ask your doctor. I'm sure glad I did!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.