Sector Weightings Skew Individual Investors' Results

By Drahuschak, Gregory M. | Tribune-Review/Pittsburgh Tribune-Review, November 4, 2007 | Go to article overview
Save to active project

Sector Weightings Skew Individual Investors' Results


Drahuschak, Gregory M., Tribune-Review/Pittsburgh Tribune-Review


Despite the credit market's trials and tribulations -- and $95 crude oil -- the stock market had a relatively productive October.

The S&P 500 index rose 1.48 percent to bring its year-to-date total to a 9.24 percent gain. October's results were nearly half of a percent higher than the 58-year average for the month.

Results for the S&P 500 or any other market index, however, can be misleading.

The S&P 500 consists of 10 weighted industry sectors. For most of its history, the index was market-value weighted by considering all outstanding shares in all the companies. Recently, the index was "float" weighted. Only shares that Standard & Poor's determines are available for public trading are considered now. Shares not in public hands are excluded from the calculation. Not only are the stocks weighted, but so are the sectors. The financial sector's 19.25 percent weighting by far is the largest. The materials sector on the other end of the spectrum represents only 3.33 percent.

The differences in sector weightings can have a significant effect on individual investors' results.

After the major market drop in 2000, diversification was widely touted as being the magic elixir for reducing risk and improving portfolio results. This led many investors to structure portfolios to match sector weightings of the S&P 500.

The S&P 500's 9.24 percent gain by the end of October certainly was not bad, but had an investor merely given all 10 sectors equal emphasis, their return would have been 12.67 percent by the end of October.

The difference between the weighted S&P results and an unweighted portfolio largely stemmed from an 8.68 percent drubbing in the financial sector.

There are three major considerations in making an equity investment: what the market will do, which sectors will do the best and what stocks are best. Although most security analysts do not want to accept it, stock selection is dramatically less important than making good sector selection and gauging the market's direction correctly.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Sector Weightings Skew Individual Investors' Results
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?