Take the complication out of investing

In 1992, the top 10 holdings in the S&P 500 were:

  1. General Electric
  2. Exxon
  3. AT&T
  4. Wal-Mart
  5. Coca-Cola
  6. Philip Morris
  7. Shell
  8. Merck
  9. Proctor & Gamble
  10. General Motors

10 years later the top 10 holdings were:

  1. Microsoft
  2. General Electric
  3. Exxon
  4. Pfizer
  5. Wal-Mart
  6. Citigroup
  7. IBM
  8. Intel
  9. Cisco System

In 2012, the top 10 holdings were:

  1. Apple
  2. Exxon
  3. Google
  4. General Electric
  5. Johnson & Johnson
  6. Chevron
  7. Proctor & Gamble
  8. Microsoft
  9. JP Morgan Chase
  10. Wells Fargo

Today, the top 10 holdings are:

  1. Apple
  2. Microsoft
  3. Amazon
  4. Tesla
  5. Google A
  6. Google C
  8. Berkshire Hathaway
  9. Meta Platforms
  10. UnitedHealth Group

Why am I showing you this? Imagine you decide to build your own “buy & hold” investment portfolio. You buy the top 10 companies and stay invested for decades, no matter what. This is all fine and good as long as the companies continue to do well. But that is not always the case. Look at General Electric for example. The #1 company in 1992 and #2 in 2002, when it was trading at $479.50. It has been all downhill since then and is now trading at $63.69. Not only that but its CEO has announced that they are splitting the company into three. Another past giant, IBM was trading at $117.39 in 2002 and is now trading at $140.71. That’s an annualised return of 0.91% over 20 years. You would have earned a better return if your money stayed on deposit.

Index It

That is why using an index (or a fund manager) is better than picking your own stocks. They follow a strict process on who is in the index and who is not and the weightings in each holding. If you look at the 2012 holdings, Microsoft was #8 and as it grew, it is #2 ten years later. Meanwhile Exxon went from #8 to dropping out of the top ten a decade later. Companies like companies like Amazon, Tesla, NEVIDA and Meta came along and joined the top 10. Using an index keeps your investment portfolio fresh and up to date with moving markets, without you having to worry about making the changes yourself.

I can make those changes too!

Never underestimate investor behaviour when it comes to buying and selling stock. In 2010, I met a client who worked for National Irish Bank. He had held €600,000 in NIB shares that were worth €60,000 when I met him. I asked him if at any point when his shares were tumbling in value, that he thought selling them would be a good idea? He said he’d never even thought of it. And he’s not alone. How many people are still holding AIB shares, waiting for them to come back in value?

We don’t like to admit to making a mistake or that we backed a loser. We like to think that in all instances, they will come back. And we can be over optimistic too, thinking they will come back with a bang. And when they do, we can tell everyone about the amazing short term growth of the share price. Of course, we will conveniently ignore the decades of lost grow and never mention the ones that just wither away (Kodak was in the top 10 for the early 1980’s and IBM was the #1 holding for most the the ’80’s).

Or what if the shares do actually do well and you develop an over concentration in one company? You believe that these companies can go higher but you are also faced with a tax bill if you do diversify. Capital Gains Tax bills is the biggest barrier I come up against when advising clients to diversify out of the company shares that they own. There are so many employees who are reliant on the same company for their income and investments but they won’t diversify because of tax. Even though they will have to pay it at some stage, they want to put it off as long as they can.

If you do decided to rebalance your portfolio, what are your metrics for doing so? Can you tell between a blip in share price and a gradual but permanent decline? Should you just reduce your holding or get rid of all of it? What is your process? Investing in an index has strict criteria on what stock makes their index and the weighting of it. The emotion is taken out of it. And of course, the index can change the stock weighting without triggering a tax liability for you.


Steven Barrett

4 July 2022