The History of Index Investing and the U.S. Stock Markets

February 11, 2021

The History of Index Investing and the U.S. Stock Markets with Bud Kasper

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The History of Index Investing and the U.S. Stock Markets Show Notes

What exactly is index investing? Why do specific companies make up the Dow Jones Industrial Average, the S&P 500, and the NASDAQ? Should we be investing in index funds, or is there a better way?

Here to help me answer all of these questions is the co-host of America’s Wealth Management Show, Bud Kasper. He has 38 years of experience in financial services, and we’ve done hundreds of radio shows and videos together.

Today, we take a deep dive into index investing, peel back the layers, and simplify the complex as you build your portfolio at any age.

In this podcast interview, you’ll learn:

  • Why you shouldn’t look at the Dow or any other single index to understand how the markets did on any given day.
  • Which companies make up some of the most common indices and why they don’t change very often.
  • Why building a portfolio of individual stocks included in an index fund defeats the purpose of the index.
  • How index funds can be used in passive investing.
  • How overreliance on indices creates risk when compared to a more diversified, predictable, and consistent portfolio.

Inspiring Quote

  • “(With 5G) You’re going to see speeds that are going to be unbelievable. What’s that going to do? I believe that’s going to lend itself to other capabilities of technology that would, in fact, I think support tech being a decent place for people to invest for many years into the future, in my opinion.” – Bud Kasper, CFP®, AIF®
  • “When you look at the higher amount of weightings of participation that you have in tech, my advice to anybody would be you’d better have something on the other side, something that would work counter to what technology would do if, in fact, it got upset and went down.” – Bud Kasper, CFP®, AIF®

Interview Resources

Interview Transcript

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[00:00:09] Dean Barber: Welcome to The Guided Retirement Show. I’m your host, Dean Barber. You’re going to love today’s program. I have with me a longtime partner and co-host of America’s Wealth Management Show. None other than Bud Kasper, 38 years of experience in the financial services industry, married with my 33 years of experience in the financial services industry.

Today, what we’re going to do is we’re going to break down the idea of index investing and we’re going to talk about the history of the Dow Jones Industrial Average and the makeup of the Dow Jones Industrial Average, the history of the S&P 500 and the NASDAQ and talk about this idea of indexing or investing in index and really help you decide whether or not that’s how you should be investing or perhaps there’s a better way. Enjoy The Guided Retirement Show with me, Dean Barber and Bud Kasper.


[00:01:00] Dean Barber: Bud Kasper, welcome to The Guided Retirement Show, my longtime host, co-host of America’s Wealth Management show. You and I have done many, many videos. We’ve done many radio shows together, hundreds, in fact, and we’ve done a little bit of podcasting together but we did something on the radio not too long ago, where we thought, “You know what, this would be a really, really interesting podcast,” something where we talk about the history of the markets, the history of the indices, what makes up the different indices that are out there. And so, you’re 36 years now.

[00:01:39] Bud Kasper: Thirty-eight.

[00:01:39] Dean Barber: Thirty-eight years in this industry of investing and financial planning. My 33rd year anniversary was just a few months back. And so, we’ve got a lot of time, we’ve seen a lot of things, and we’ve experienced helping a lot of people. I think sometimes, Bud, we forget that you and I probably have forgotten more than what most people know when it comes to financial planning and investing, which is why we started The Guided Retirement Show, which is why we started America’s Wealth Management show. It was all about let’s educate. The smarter people are, the better decisions they can make.

[00:02:19] Bud Kasper: And the more confident they become.

[00:02:21] Dean Barber: Absolutely. So, let’s go back and talk about the history of the markets and let’s get rid of some of the lingo that’s out there. Let’s kind of peel back the layers a little bit so that people can understand what they’re hearing when you look at the TV or you pull up your phone and it says, “Oh, the Dow Jones Industrial Average is at 28,000.” What does that really even mean? Let’s start with a history of the Dow if we could.

[00:02:48] Bud Kasper: Sure. Well, first off, I think any of the indices that are out there, especially the major ones, and of course, that’s the Dow Jones and the S&P 500 and the NASDAQ and even the Wilshire 5000, which we call the total stock market index, they’re yardsticks. It’s how we measure what’s going on in a day, in a week, in a month, and so forth with where the returns are coming in at.

[00:03:12] Dean Barber: But people think it’s an average of the whole market.

[00:03:15] Bud Kasper: It’s not. No.

[00:03:16] Dean Barber: That’s my point, right?

[00:03:17] Bud Kasper: Yeah. The closest we’d come to would be that Wilshire 5000 because that means 5,000 stocks are in that index. Let’s go back to what your question was, and where did it all start. It started back in 1896 with a guy named Charles Dow and he created actually two indexes, Dean. One was called the transportation index. The other was the industrial index.

Now, even though they created at that time, Charles Dow was actually an editor for The Wall Street Journal. And even though he had been privately creating these measurements, if you will, what’s going on in the marketplace, it really wasn’t published until we got to, let’s see, what was that number? 18? Forgive me, I got to go over and look at my notes here. It was in 18, no, 19. This is good, isn’t it? But it wasn’t until in 1916 that the first publication of the Dow Jones Industrial Average was published in The Wall Street Journal, where Charles Dow was an editor.

[00:04:24] Dean Barber: Okay. So, what was the major point behind Charles Dow’s creating this Dow Jones Industrial Average? What was he trying to do?

[00:04:32] Bud Kasper: His viewpoint of this is, as so goes these number of stocks, they all kind of follow in place. In other words, there’s commonality and what the returns are. And at that time, it did make more sense from that perspective, Dean, for the simple reason that most of it had to do with rails and industry. Remember, our economy back then was manufacturing.

[00:04:54] Dean Barber: Right. So, the rails would have been the transportation index and then the industrial index would have been our manufacturer.

[00:05:00] Bud Kasper: Exactly, right. Yeah. And that became the index that people turn to find out how the market did on any given day. Interesting because even today, the Dow Jones Industrial Average is used worldwide. Now, the problem with that is that it really only represents about 25% of the market. If you look at the S&P 500, and we’ll get to that in just a moment, it represents 80% of the total market. So, those are measurements that are different. So, my point is that if I’m trying to find out how the market really did that day, I’m not looking at the Dow Jones. I am looking at the S&P 500.

[00:05:42] Dean Barber: But people talk more about the Dow than anything else. Is that because it’s older?

[00:05:46] Bud Kasper: Yeah, that’s right. It’s familiarity more than anything else.

[00:05:48] Dean Barber: So, how many stocks are in the Dow?

[00:05:50] Bud Kasper: Thirty.

[00:05:51] Dean Barber: And so, those 30 stocks make up what percentage of the total market?

[00:05:55] Bud Kasper: Twenty-five.

[00:05:56] Dean Barber: Okay. So, is that market capitalization then? Is that what that is?

[00:06:01] Bud Kasper: Actually, the Dow is a price-weighted index. The S&P 500 is a cap-weighted index. So, the price-weighted index is simply taking the number of shares multiplying the times the price to come up with a weighted average for what that is. That’s really not the best way to measure it. Actually, the S&P’s cap-weighted index is a better way of telling what the market is.

[00:06:23] Dean Barber: Alright. So, speak in English to the people that are listening to our podcast. What do you mean?

[00:06:27] Bud Kasper: Well, the capitalization of the companies where one was measuring really what the total stock exposure was with the Dow and what might be happening, the capitalization is what is this company worth? And therefore, it will have a certain influence on what the index will actually give in any given day.

[00:06:44] Dean Barber: All right. So, let’s go back to the Dow Jones Industrial Average, and we got 30 stocks that are in the Dow Jones Industrial Average. Have those 30 stocks remained consistent since its inception back in 1960?

[00:07:00] Bud Kasper: Actually, it’s not changed very much, Dean. Some have fallen off and 55 changes is the only number that have occurred since the first beginning of that.

[00:07:11] Dean Barber: So, any surprises in the stocks in the Dow? Who’s been kicked out?

[00:07:18] Bud Kasper: Well, I don’t have that list that’s associated with it, but I will go to this one and that is the longest-running company that was in the original Dow index was General Electric, and that got pulled out of the index in 2018 because the company was struggling but seems to be at this time picking up and would not surprise me that within another five or 10 years that you might see GE back in the index.

[00:07:44] Dean Barber: It’s interesting because this is supposed to be an industrial average, yet I’m pulling up the list of the stocks in the Dow Jones Industrial Average and I’ve got names like UnitedHealth, Merck, Amgen, Salesforce, Microsoft, Apple, Visa, Johnson & Johnson, Nike, Chevron. What do these have to do with industrial?

[00:08:02] Bud Kasper: Well, it’s all changed hasn’t it? We failed to keep our manufacturing side of our economy as successful as it was in the earlier years. And therefore, other areas of the market have taken over and become more prominent in terms of how it’s represented in the index.

[00:08:22] Dean Barber: So, are these 30 stocks simply the 30 largest companies in the United States?

[00:08:27] Bud Kasper: Not necessarily so. Again, they do it by this price-weighted index that they’ve created with that and every one of these indexes has a committee, Dean, and then the committee really ultimately decides if there needs to be a change in the number of stocks and what stocks are in the index.

[00:08:45] Dean Barber: When you get a company in there like 3M, Boeing, I can see that but McDonald’s Industrial Company? Not really.

[00:08:54] Bud Kasper: No, it isn’t. It’s misnamed if you want to know the truth in terms of Dow Jones Industrial Average but because that’s where it came from, they’ve kept it all along, but most certainly because people wouldn’t follow it. It was purely on the industrials. And it becomes more of an in-sector type of index. It was purely on the industrial side of the economy.

[00:09:14] Dean Barber: What about one that came along as a sister measurement, the Dow Jones Transportation Average?

[00:09:20] Bud Kasper: Well, that actually was created first. It was created in the same year back in 1896 but that is a lesser utilized index of the Dow family.

[00:09:33] Dean Barber: Interesting. So, here we have in the Dow Jones Transportation Index. This makes sense. Okay. Alaska Air, American Airlines, Avis Budget Group, CH Robinson, CSX Corporation, Delta Airline, FedEx, JB Hunt, JetBlue, Kansas City Southern, Norfolk Southern, Southwest Airlines Union Pacific. This is truly a transportation index.

[00:10:00] Bud Kasper: Exactly. So, it seems much more specific than, as an example, if you would go do technology or healthcare and so that represents what they define as their transportation index.

[00:10:13] Dean Barber: Interesting. So, if someone says let’s see if we can match the returns of the Dow Jones Industrial Average, is that something that people should be really trying to do?

[00:10:25] Bud Kasper: If they think that will help them in achieving the returns that they’re looking for, it could be. So, we turn to the S&P 500, we know there’s a number of companies that replicate that index in a mutual fund format. You can also get the Dow in a mutual fund format as well. But again, because it is smaller and really doesn’t represent a wider arena of various places where we can invest, it isn’t as effective and so, therefore, it’s not used as much.

[00:10:58] Dean Barber: Why would a person then, Bud, if they were going to say, “Well, I want to match the returns of the Dow. I can pull it up online. I mean, this instant information and technology that we live in today, I can pull up online the 30 stocks in the Dow and I can go over to a number of different custodial shops, number of different discount brokerage type things, and I can just buy those 30 stocks and hold on to them.” Do I buy them in equal portions? How do I determine what weighting those have with inside of the Dow?

[00:11:25] Bud Kasper: Well, you’d have to go in and look at the Dow itself to see exactly how they are weighting the index but remember what I told you. It is price-based from that perspective, but you’re right. You could duplicate that and do it on your own. The reason people wouldn’t do it in the past is a lot of times because of trading costs associated with buying each of those stocks into the portfolio.

[00:11:47] Dean Barber: But I’m only going to buy them one time and then I’m just going to hold on to them, right?

[00:11:49] Bud Kasper: Yeah. You can do that. There’s no reason why you can’t.

[00:11:52] Dean Barber: So, if I got 30 stocks, I’m going to put a little over 3.3% in each one of those stocks, and then I’ve got my portfolio.

[00:12:02] Bud Kasper: You got your index.

[00:12:03] Dean Barber: Set it, forget it?

[00:12:04] Bud Kasper: Well, you could. I wouldn’t recommend that necessarily so but I think what you’re saying is a valid point. You could very well easily do them. By the way, it’s probably easier to do it these days than it would have been 20 years ago when the price of buying stocks was much greater vis-a-vis commissions, as opposed to getting the low-cost way of getting into stocks that we have today.

[00:12:26] Dean Barber: Okay. All right. So, I think it’s an interesting history of the Dow Jones Industrial Average, and what’s in there, how it’s weighted, etcetera. I don’t believe that it’s as simple as just going out and putting 3.3% of my money in each one of those 30 stocks, making it my 100%, and then just setting it and forgetting it because those will change. There’s companies that are going to come in. There’s companies that are going to get kicked out. So, yeah, you got to do that. And the question is, is that a smart way to do it?

I mean, there’s obviously inside the Dow, when I was naming those just a handful of companies in there, there are some of those companies, obviously, that are really technology companies. There are some companies in there that are healthcare companies. So, does it make sense to then just say, well, let’s scrape out the ones that aren’t in favor in a given year. And maybe we only hold technology because technology is hot, maybe we at some point only want to hold healthcare, because that’s the hot thing.

[00:13:22] Bud Kasper: But then now you’re defeating the purpose of the index, and that is to have an average of all the various industries that are out there, and now you’re becoming more specific. Of course, there are indexes, and literally, there are thousands of indexes out there. I know that sounds like a crazy number, but it’s real, that you can go to. If you go to a company called Russell, you get the Russell 1000, the Russell 3000.

And each of these have various definitions. Some of them overlap to a certain extent at various periods of time. I think if we were to shift the conversation, though, and we go to the S&P 500, the Standard and Poor’s 500 index, which was created in March of 1957, the company Standard and Poor’s at that time had looked at the Dow and said, “This is an ineffective way to truly represent what the broad-based market looks like now, much different.” And so, with that, the original premise was to divide the market up into 10 sectors.

Later, it became 11 sectors. These are just different categories of investing that investors in fact can go and participate in. But what the concept was is to go in and evenly weight or closely evenly weight each of the participating stocks in each of those particular sectors. And so, you would recognize all these names. I don’t have them all memorized but it would be like information technology, healthcare, communication services, financials. These are just a few of the categories or sectors if you will, that are represented in the S&P 500.

[00:14:59] Dean Barber: So, some of the stocks in the S&P 500 are actually the same stocks in the Dow Jones Industrial Average.

[00:15:03] Bud Kasper: That’s correct.

[00:15:04] Dean Barber: So, let me just read some of the top lists, some of the top ones off the list here. Apple, Microsoft, Amazon, Facebook, Alphabet which is Google, Berkshire Hathaway, Johnson & Johnson, Procter and Gamble, Visa, Nvidia, JP Morgan, UnitedHealth, Home Depot. So, there’s a few that I just read off of that list that I actually go back and mirror what’s in the Dow Jones Industrial.

[00:15:25] Bud Kasper: Sure. Well, why would Standard and Poor’s eliminate a stock just because it was another index when they’re trying to represent the broad-based market? And as I said earlier, the S&P has a great deal more validity in terms of what the overall market is truly doing because, as I stated, it’s about an 80% representation.

[00:15:43] Dean Barber: Well, so if I look at the S&P 500, Apple actually makes up 6.3% of the S&P 500. Microsoft makes up 5.6% of the S&P 500, Amazon making up 4.6. And then you put Facebook and Google in there, and you got about another 6%. So, all of a sudden now, I’m up to over 20% of the entire S&P 500 in five stocks.

[00:16:05] Bud Kasper: You’re absolutely correct. And this is what has been transpiring at Standard & Poor’s. So, I’m going to make an opinion here, if you will. The concept that was originally created I thought was well-balanced and well-thought-of in terms of how to represent the total market for investors. Okay. As time has gone by, though, what we’ve seen is the Investment Committee at Standard and Poor’s has been playing a chess game with these various sectors.

Now, what I mean by that as an example, and you have to excuse me, I have to reference this visually, and that is if you go in and you look at technology, by the way, it used to be information technology. Now it’s technology. And you’ll see it’s 25.7% of the S&P 500 index, Healthcare’s 15.4. Communication services are 10.8. Financials are 10.6. Consumer discretionary is 10.5. Industrials, 7.9. Consumer staples, 7.4. Utilities, 3.3. Energy, 3%. Real estate, 2.9. And the last one, materials is 2.7.

But here’s where the game is being played, and let me make this point because when you start talking about these indexes, we’re talking about something that is referred to as passive investing. I mean, you invest in it. You don’t trade it. It’s already built for you. If there’s any changes to be made, the committee will do that on behalf of the index. If you have an active portfolio, that’s where you actually have a manager or a team of managers that are working to represent maybe a more specific part of the market, sometimes a broader base market. But again, they’re not indexing.

They’re actually going in and actively managing the portfolio with the way they think it best serves their shareholders at that time. As time has gone by and you’ve probably, I know you’ve heard, Dean, but perhaps our audience has and that is where you’re starting to see what they call equal-weighted.

[00:18:08] Bud Kasper: And the equal-weighted is effectively going in and saying that we’re just going to have the same amount of money in each of these. And what’s my return going to be? Well, if you would equally weight the S&P 500 today, you would have a very different return than what we’re currently experiencing. So, what I’m getting to is over time, the S&P 500 committee has been tilting the portfolio, as you’ve mentioned just a moment ago, to favor technology.

Well, some people would say, “Well, isn’t that now active investing instead of passive investing?” In my opinion, I would say yes and you might say, “Well, what’s the motivation behind that? Why didn’t they leave it as an equally-weighted index?” And the answer is money. Because when you think of all the various institutions out there, whether it’s pension plans, or 401(k)s or IRAs, or whatever, they have a lot of money that has been invested in this famous index.

And if the equally-weighted and the returns weren’t as good as they had anticipated, then that money is probably going to leave that index. If that happens, that’s not what they want to see, right? So, if that’s what is happening, now we have to have a better understanding as to why they are tilting the portfolio into more technology.

[00:19:30] Dean Barber: Well, I know on one of the radio shows we did earlier this year in 2020, we talked about how you take those five stocks that are making up well over 20% of the S&P 500 and we looked at the return of those five stocks versus the other 495 stocks. If you take those five stocks out of the S&P 500 at the time, you are actually in negative territory as far as return and at the time we did that show, I think the S&P was up like 9% or 10% on the year. So, if you take those five stocks out or if you equal-weighted across all those, there’s no way that you’re going to keep up with the performance of the way that the Standard & Poor’s has weighted the S&P 500 index.

[00:20:14] Bud Kasper: So, in my opinion, is they have fallen away from what the index originally was going to do and they’ve tilted it, as I like to say, in favor of that but they even have done some nice as I referred to chess moves inside these particular areas. So, let me give you a point. Microsoft, would you say that’s a technology stock?

[00:20:36] Dean Barber: Absolutely.

[00:20:37] Bud Kasper: Good. Yep. You’d be right with that. So, is Apple. What about Amazon?

[00:20:42] Dean Barber: Amazon is a retail.

[00:20:45] Bud Kasper: Okay. They have that as consumer discretionary. Okay. Then they have Facebook. Where would you have that?

[00:20:52] Dean Barber: Technology.

[00:20:54] Bud Kasper: Close. Communication services. Alphabet, communication services. Johnson & Johnson, healthcare. Berkshire Hathaway, financials. Visa, technology. And JP Morgan is financial.

[00:21:04] Dean Barber: Visa is technology?

[00:21:05] Bud Kasper: Yeah. So, if you look at these, what I’m saying is some of these names that you and I would naturally define as technology are finding themselves into the other categories of the index. And because of that alleged diversity that is coming out of these various 11 titles that I just shared with you, you’re getting a higher representation in the actual what I would refer to as the tech sector.

[00:21:33] Dean Barber: It’s interesting. I just pulling up here and saying, all right, well, let’s compare this equal weight idea over time to the S&P 500 using the weighting that Standard & Poor’s uses. If I go back over a 10-year period. I got a total return on the S&P 500 index of 245%.

[00:21:52] Bud Kasper: Cumulative.

[00:21:53] Dean Barber: Cumulative, right, and 198.5% on the equal weight. I take that back over 15 years and I’m a lot tighter. There were actually some periods of time, 2009 for example, where the equal weight was up 44%. The regular S&P was only up 26%. In 2010, equal weight was up 21%. Regular S&P 500 only up 15%. Another one, 2013, equal weight up 35%, normal S&P 500 index only up 32%. So, there have been some years when that equal weight would have been beneficial. So, I guess you and I or anybody that’s listening to our podcast can go out and they can choose whether they want to buy an ETF that’s an equal weight ETF versus a regular S&P 500 ETF which is designed to mirror the S&P 500 index as it’s weighted today.

[00:22:42] Bud Kasper: And it only makes sense that if you’re using an equal-weighted at certain times, you should do better because there’s going to be times when other aspects of the 11 sectors are going to do better than just technology. But right now, as you’ve noted before and we’ve discussed on the radio show, technology has been a significant winner, as we know, for shareholders and therefore the benefit is going to be with the tilting, if you will, into higher technology companies in the index.

[00:23:12] Dean Barber: You know, if I take these ETFs back as far as I can, we’re going back to April of 2003, comparing the equal weight index to the S&P 500 index as it’s weighted now, the equal-weight index actually outperformed.

[00:23:26] Bud Kasper: Yes, it does. But let’s remember, about 2003 because that was the recovery year if I’m remembering right, so we were at 2001 and 2002, the market had just lost approximately 46% in a three-year timeframe. And at that time, now we go into the year…

[00:23:46] Dean Barber: So, you’re really just coming out of that timeframe but the bottom line is, I mean, it could have been a coin toss. Which one was going to do better? I mean, it wasn’t a significant outperformance over that period of time but still an outperformance, nonetheless. And so, I think that when people want to invest in these indexes or they want to try to mirror an index they really need to understand what’s going on behind the scenes and I think the reality saying, “All right. If you got five stocks out of the S&P 500 that are the only reason that the S&P 500 is in positive territory.”

I think that that is something that maybe you want to step back and take a look at and ask yourself a question. I mean, is this really an efficient market right now? Are things really moving in the direction that we should? By the way, you and myself and Jason Newcomer, one of our other certified financial planners here at Modern Wealth Management, we did a couple of shows here on The Guided Retirement Show, Episodes 12 and 13, talking about the difference between mutual funds and ETFs and the pros and cons between both of them.

So, if you haven’t listened to that particular podcast, I’d encourage you to find Episodes 12 and 13 of The Guided Retirement Show. Listen to those and you’ll understand more about what we’re talking about, the difference between Mutual funds and ETFs. And they both have their positive things. The idea behind the mutual fund was you got a professional manager back there.

[00:25:07] Bud Kasper: And the same diversification.

[00:25:08] Dean Barber: That’s saying, look, I don’t want to just own those 500 stocks. I don’t want to just weight equal to what they are. I don’t want to weight the way that the S&P is. Through research and through understanding valuations and through understanding corporate earnings, that mutual fund manager believes that they can provide a better risk-adjusted return over time.

[00:25:32] Bud Kasper: So, let’s talk about that because that is how we build portfolios. In other words, the person say, “Well, I don’t know why I don’t want active management. It’s been proven that passive management through the S&P 500 index has been a good way to invest,” and I’m not here to dispute that.

However, I might add that, well, there are managers that do an excellent job and, by the way, I think that this is starting to even out again between active and passive investing but most certainly, you could put into your portfolio a certain percent that would be in the passive investing of the index, and then have another portion of your portfolio and something that is more actively traded where you might get some additional protection, you might get some additional return, but of course, that is all subjective to the skills of the manager and the market in general.

[00:26:20] Dean Barber: And it’s going to depend on the year and what’s going on during that particular year.

[00:26:24] Bud Kasper: The cyclicality of the market.

[00:26:26] Dean Barber: Exactly. Right. So, I just threw into our chart here a mutual fund that we have in many of the different model portfolios that we run, and not knowing what was going to happen versus the equal way to the S&P and I ran it all the way back to that 425 of ’03.

[00:26:43] Bud Kasper: Wow. Okay.

[00:26:44] Dean Barber: And guess which one won.

[00:26:47] Bud Kasper: I’m going to guess the index.

[00:26:50] Dean Barber: Nope. The active manager.

[00:26:51] Bud Kasper: Okay. I didn’t know who the manager was so I had to make a guess.

[00:26:54] Dean Barber: Well, I’m not going to say who it is.

[00:26:56] Bud Kasper: Yeah, that’s fine.

[00:26:58] Dean Barber: Because, obviously, they didn’t win every year. There were some years where they were far behind the index. There were some years where they were well ahead of the index but long story short is that over a longer period of time, the active management here did win. I think that if you think about active management, Bud, versus the passive of owning of the index, there are periods where passive does better but then there are periods when active management does better. I think it’s in the times of great uncertainty of high volatility where the active manager actually has the edge over the index itself. If you’re constructing a good portfolio, kind of an all-weather portfolio, you’re going to have a combination of the two.

You’re going to have some passive inside that. You’re going to have some active inside that. And you may even have some tactical components as a part of your overall portfolio too where that tactical component may be something like a sector rotation type of model where certain sectors are doing better. You want to rotate a little bit more money into those sectors that are actually outperforming.

[00:28:05] Bud Kasper: Right. Here is a self-fulfilling philosophy as well, Dean, and that is 401(k)s and pension plans, where you have already put into your mix of investments the S&P 500. And so, with every paycheck that is going into 401(k)s around the entire United States, what is that doing? That is supporting, if you will, the price of the index and perhaps pushing it higher. So, you have kind of, as I say, a self-fulfilling philosophy associated when you have an index that is now being used as a core meaning a major part of many 401(k) plans across the United States.

[00:28:44] Dean Barber: Well, and even if it’s not the S&P 500 index, likely there’s going to be money going into a large-cap core fund or a large-cap growth fund or a large-cap value fund. So, you’re right. You have a constant money flow into those different sectors and there’s one thing that you and I both know, and that’s as long as people are willing to buy it, at whatever price it is, the price can continue to push higher.

And that’s really what happened during the dot-com bubble was people were willing to pay continuing higher and higher and higher prices. If you’ll recall, Bud, back in, it just can go, this is again about the indexes but think about what the Dow Jones Industrial Average was doing in 1996, 1997, 1998, 1999. It was an absolute dog compared to the S&P 500, and the S&P 500 was an absolute dog when you compared it to the NASDAQ index, which we haven’t really even got to that, right?

[00:29:37] Bud Kasper: Right.

[00:29:37] Dean Barber: Why is that? Well, it’s because the money. Follow the money, guys. Follow the money, right? And the money was flowing into technology. Well, today we’re talking about technology making up 25% of the S&P 500 and I believe that it’s, heyday, Bud. You may not have these statistics in front of you but I believe in its heyday back in 1999 that technology actually made up over 30% of the weight of the S&P 500 index.

And so, it would stand to reason that the S&P 500 index would have outperformed the Dow Jones Industrial Average, and especially the Dow Jones Transports. And it was that point in time when people said brick-and-mortars is gone, your value companies are history, we’re in a whole new dynamic, whole new era, and it’s going to be all about tech.

[00:30:22] Bud Kasper: Well, you made the point. 25.7% of the index is right now in technology. It is, of course, the top sector that is associated with that. I find it fascinating because I’m under the opinion, and this is my opinion, that technology is not going to abate, and what I mean by that is I think technology is going to continue to evolve.

There’s something out there called Moore’s law and it was actually created back I believe it was 1968, 1969 by I believe he was a computer scientist, who was basically saying at that time that the size of computer chips and the amount of power associated with those chips x potentially doubles every three to five years or something along that type of formula. If you look at that and look at where we are today, and you look at the iPhones or whatever phone you use, and you understand that you have more computer power in that phone than it took to put the man on the moon for the first time for the United States, and it’s just amazing.

And what are we going into next? 5G. So, as 5G is going to be introduced in the fourth quarter, first quarter of next year, and so forth, it’s going to be I think an amazing thing. I had the opportunity of talking to an executive of one of the bigger money management houses and he have seen the 5G. Here’s the comment that he made to me, “Within a matter of seconds, you were able to download all, I don’t know how many, 12 years of Seinfeld.” So, you’re going to see speeds that are going to be unbelievable. What’s that going to do, Dean? I believe that’s going to lend itself to other capabilities of technology that would, in fact, I think support tech being a decent place for people to invest for many years into the future, in my opinion.

[00:32:22] Dean Barber: I agree. So, I want to shift gears, Bud, because I think you’re making that point really well. Let’s keep talking about the sector weightings and want to switch gears to the NASDAQ. Okay. So, before we switch gears to the NASDAQ, I’m going to go back and I’m going to read off the top five stocks in the S&P 500, Apple, Microsoft, Amazon, Facebook, and Google. Top 5, 25.7%. Now, I’m going to name off the top five stocks in the NASDAQ 100 index. Apple, Microsoft, Amazon, Facebook, Google. 46% of the S&P 100 in five stocks.

[00:33:14] Bud Kasper: And what should that tell investors? You’re in danger. You’ve got such a high concentration here that if things go bad, it could go very badly. However, the offset is what I just described.

[00:33:27] Dean Barber: When it goes well, it goes really well.

[00:33:28] Bud Kasper: Well, that plus the fact that I think the evolution of technology will continue to support those. It’s not that they can’t lose money. My golly, we saw that in after the calendar year 1999 because in 2000, we lost over 10.5% in the first year. We lost 13.5% in the second year. We lost 23.5% in the third year. We’re down approximately 46.5% in that timeframe. Pretty substantial drop to say the least and people were not very happy at that point.

[00:34:00] Dean Barber: But that was the S&P. The NASDAQ was over 70% negative, right? And why? Because of the concentration in that sector.

[00:34:12] Bud Kasper: And because they hadn’t really established the earnings to be able to support that price, or for that matter, even half of the price.

[00:34:18] Dean Barber: Right. Now, you’ve got – guess who’s coming in number six on the NASDAQ 100. Tesla.

[00:34:24] Bud Kasper: Oh, yeah. Yeah, Tesla, NVIDIA.

[00:34:27] Dean Barber: NVIDIA, Adobe, Netflix, PayPal, Comcast, Intel. Here’s one that would surprise you, a couple that would surprise you in the NASDAQ 100: Pepsi, Costco, Broadcom. Amgen, Starbucks, Zoom. Obviously, we’d expect that to be in the midst of very small weighting. It’s like seven-tenths of 1% of the S&P 100. Bottom line is I think when you start thinking about these indexes and you start thinking about, “I’m going to own this index, I’m going to mirror this index,” it’s critical that you really understand what you own.

In a recent radio show that you and I did, Bud, on America’s Wealth Management show, I said, “Man, I’m going to talk about Bud’s biggest investment mistake of his life, that he didn’t put 100% of his clients’ money into Tesla 12 months back.” You would’ve made 600%. Right? And the reason you wouldn’t do it is because you’re not a gambler. You’re not rolling the dice here.

[00:35:27] Bud Kasper: Especially with clients’ money.

[00:35:30] Dean Barber: But bottom line is it’s easy for people to see when they turn on the evening news, they turn on CNBC, Fox Business, whatever it is, you pull up your phone, you can see here’s what the index did. You need to have some perspective of what’s driving that index and what’s in it. Before you start comparing the performance of your portfolio to any index, you should have a clear understanding of what you have. So, if you’re going to say, hey, I want to mirror the S&P 500 index, ask yourself a question. Are you willing to commit 25% of your money to technology?

If you want to mirror the NASDAQ index, are you willing to commit 46% of your money to technology? Do you have that much conviction? And is that the only thing that you want to put your money into? And if you can step back for a minute and get away from the hype and get away from the numbers and the greed or the fear, whatever it is that’s driving that emotion of investing, and put some logic into it, I think that really is what people need to do, Bud.

[00:36:38] Bud Kasper: I think that’s good advice, Dean, and I think from that perspective, when you look at the higher amount of weightings of participation that you have in tech, my advice to anybody would be you’d better have something on the other side, something that would work counter to what technology would do if, in fact, it got upset and went down. I mean, if you look at just this year, we got as low as, help me out with this Dean, about 20% on the…

[00:37:06] Dean Barber: You’re looking at for the NASDAQ?

[00:37:08] Bud Kasper: NASDAQ, yeah.

[00:37:08] Dean Barber: You’re looking for the S&P?

[00:37:09] Bud Kasper: Yeah.

[00:37:10] Dean Barber: I can tell you here in just a minute.

[00:37:12] Bud Kasper: So, I believe it was down close to 20% and then it got – I’m sorry. I was talking about technology. And then we’re going to a 42% return was its high at this point of the year and now it’s come back down to about 27% positive. Now, that’s using the NASDAQ 100 index, I believe, Dean.

[00:37:32] Dean Barber: Yeah. If you look at the broader base, NASDAQ, I think it was down 23% at its worst point in 2020. We go to the NASDAQ 100. It was down about 19% it is worth so pretty close.

[00:37:48] Bud Kasper: Yeah.

[00:37:49] Dean Barber: NASDAQ 100 positive at the time that we’re recording this podcast, which is on November 4, 2020. You’ll be listening to it, obviously, at a different date, that NASDAQ composite was up by 29.87. The NASDAQ 100 positive by 29.87 for the year.

[00:38:06] Bud Kasper: Well, it’s high for the year.

[00:38:08] Dean Barber: The high for the year was a positive, you’re right, 42.95. Okay. That’s the NASDAQ 100 and then the NASDAQ composite itself positive by 34.37. So, at NASDAQ 100, again, it’s a tighter concentration just like if you were to go to the S&P 100 as opposed to the S&P 500, you’re going to get a heavier concentration in those big names that we talked about.

[00:38:31] Bud Kasper: Right. And if you like to invest that way, well, more power to you. If you want to have that exposure but do it with a greater amount of participation than that which is defined by the index itself, there are ways a billion in technology that goes much broader than 100 stocks.

[00:38:48] Dean Barber: For sure. But also, you mentioned something earlier that if you’re going to do these things, marry it with something that can give you an offset, right? Marry it for something that maybe you want to marry it with some treasuries, okay, in whatever amounts. You can start to measure those things and model it out. Maybe you want to add in some gold in there as a protection mechanism. Now, obviously, you start to add those things. It can dampen the amazing performance during great years but can also dampen the losses during those years where the markets go the direction that we don’t want them to go.

[00:39:24] Bud Kasper: So, true, Dean. Yep. Wise words.

[00:39:26] Dean Barber: Well, Bud, I think this has been fun talking about the indexes. And I think the key for everybody listening here is if you’re going to expect that your returns should match an index, then you need to understand what that index holds. What’s it made up of? And then ask yourself the question, is that really where you want your money? And are you willing to take the risk that that index itself has?

Or would you rather have a portfolio that’s more diversified, has more predictability and has more consistency of returns, and ultimately, a higher degree of safety? And ultimately, you and I both know this, Bud, because, again, you’re 38 years, I’m 33 years of doing this. The best way to do it is to define your objective. And you define your objective by utilizing our proprietary system called the Guided Retirement System, which essentially takes a look at every single aspect of your financial life and defines something that’s been hard to define for people, which is your personal return index.

In other words, identifying what your money needs to do in order for you to accomplish not just today’s objectives, but objectives way out into the future. And then you can design the portfolio that has the highest probability of achieving that personal return index and do it with the least amount of risk possible. Or you can just roll the dice and try to get as good a return as you can every single year. Depends on what you’re trying to do. I prefer the first method described there, Bud, because I want the predictability.

[00:41:00] Bud Kasper: Yeah. Well, I don’t like craps so I don’t think that’s what we want to be betting our retirement on.


[00:41:06] Dean Barber: Well, Bud, thanks for taking the time to spend with our listeners here on the Guided Retirement Show. I appreciate you taking time here and we’ll be talking here shortly on America’s Wealth Management show. By the way, America’s Wealth Management show is also a podcast so you can find America’s Wealth Management show on your favorite podcast app. Make sure that you take time to give us a thumbs up here, subscribe to the Guided Retirement Show, share this with your friends and relatives. The more education you have when it comes to investing and overall retirement planning, the better decisions you will make for yourself.


Investment advisory service is offered through Modern Wealth Management, an SEC-registered investment advisor.

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Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.