Building A Stock Portfolio? Here's Your Competition

While there's no silver bullet for building a portfolio, you don't have to be a Wall Street strategist to do it. Benchmarks are a useful guidepost, and you can learn a lot from them about your performance and strategy as you move along.

Consider the S&P 500. It features around 500 companies and covers 80% of available US public equity market capitalization, and it's a ‘go-to' barometer for many investors. The best part is, you can use it to understand the broad market and make adjustments to your own strategy.

One of the first things to notice is the familiar names at the top. As of April 8, 2023, the top stocks by market weight in the index are Apple Inc. AAPL, Microsoft Corp. MSFT, Amazon.com Inc. AMZN, NVIDIA Corporation NVDA, Alphabet Inc. Class C GOOG, Berkshire Hathaway Inc. Class B (NYSE: BRK-B), META Platforms Inc META, Exxon Mobil Corp. XOM and UnitedHealth Group Inc. UNH.

Looking deeper, the S&P has a huge weighting in technology, at 26%, and much smaller exposure for energy, materials, utilities and real estate. As of April 8, 2023, the weights are as follows:

Information technology: 25.8%

Health care: 14.4%

Financials: 13.1%

Consumer discretionary: 9.9%

Industrials: 8.4%

Communication services: 8.3%

Consumer staples: 7.4%

Energy: 4.7%

Utilities: 2.9%

Materials: 2.6%

Real estate: 2.5%

The weightings are strongly influenced by recent performance and there are significant changes over time.

So how can you use the S&P in your own process? Start by understanding your performance in the context of the broader market. It'll help you understand your strengths and weaknesses as you see how your portfolio is tracking against the index, and why.

Consistent underperformance versus the index could be an indication that you're missing out on key trends in technology, which has the biggest weighting in the index. At the same time, outperformance could indicate leverage to trends that have a low weighting in the index - energy, for example. This holds true for strategy too. Overweighting and underweighting sectors may enhance performance during market cycles.

The key is to understand how your portfolio squares against the broader market, where you might be exposed to higher risk but unaware of it, and where you might want to make adjustments over time.

Source: https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

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