Learn to Debunk Some Myths of the S&P 500

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Physician's Money Digest, November 2005, Volume 12, Issue 15

Established in 1923, physician-investors usethe S&P 500 Index as a proxy for the stockmarket. At the end of the year, when investorswonder how their portfolio of stocks didcompared with the market, they are referring to theS&P 500 Index, which encompasses large US companiesand is maintained by Standard & Poor's(www.standardandpoors.com).

Misconceptions Exposed

Many people mistakenly believe that this indexis simply the 500 largest companies in the UnitedStates, but it's not. The Standard & Poor's indexcommittee attempts to construct the index so thatit represents a broad base of diversified companies,and decides when to add or remove a companyfrom the index. For example, when news of Health-South's illegal accounting practices surfaced, thecommittee quickly met and replaced Health-Southwith another company.

Many people, including experienced investors,also assume that the S&P 500 Index is a conservativestock investment, since 500 large US companieswould seem to provide very broad diversification.Yet this is not necessarily the case due to the way theindex is constructed. The 500 companies are notequally weighted, but rather weighted based on theirindividual capitalization or how big they are. The top100 companies account for approximately 70% ofthe Index, which creates an index that is much moreconcentrated and volatile than it appears.

S&P 500 Alternative

One way to counteract this overconcentration isto invest in the S&P Equal Weight ETF, which wasformed in collaboration with Rydex Global Funds.This exchange-traded fund rebalances its stocksquarterly to ensure that each stock is weighted equally,which means greater exposure to smaller large capstocks and value-oriented stocks. Historically, valuestocks have held up better during tough markets andhave outperformed their growth counterparts overlong time periods. Just look at comparative returnsover the past 5 years: The S&P 500 Index lost 1.3%while the S&P Equal Weight ETF earned 7.08%.

By understanding how the S&P 500 Index works,physician-investors can dispel its common misconceptions.Consult with your financial advisor todecide whether the S&P 500 Index or S&P EqualWeight ETF is better for you.

, is the founder of the Welch Group,

LLC, which specializes in providing fee-only wealth management

services to affluent retirees and health care professionals

throughout the United States. He is the coauthor of J.K. Lasser's

New Rules for Estate and Tax Planning (John Wiley & Sons, Inc;

2001). He welcomes questions or comments at 800-709-7100 or visit

www.welchgroup.com. This article was reprinted with permission from the

Birmingham Post Herald.

Stewart H.Welch III, CFP®, AEP