Understand Your Risk

While it is true that investing in an index like the S&P 500 is a wise long-term strategy, there are risks in that approach. For example, Vanguard S&P 500 ETF (VOO ) is one of many choices.

Understand Your Total Risk from Large-Cap Investments

Microsoft Corp (7.18%), Apple Inc (6.17%), NVIDIA Corp (4.56%) and Amazon.com Inc (3.75%) make up a significant portion of the total assets. These four are almost 22 percent of VOO and every other similar index fund. The top ten investments make up 32% of the total invested capital.

Recent News from Barron’s

Tesla is a large-cap stock, and it is down 32% YTD. Think about supply and demand. More companies are making electric vehicles at a time when demand is slowing.

“Tesla’s disappointing first-quarter delivery numbers have Wall Street wondering if there is a bigger issue at Elon Musk’s electric-vehicle maker. A wider-than-expected 46,561 discrepancy between the number of Teslas produced and sold suggests there could be a serious demand issue, Deutsche Bank analyst Emmanuel Rosner said.” – Al Root and Janet H. Cho, Barron’s

“Tesla’s place among the so-called Magnificent 7 stocks is under serious threat. In fact, the group’s role in the driving market higher is also at risk. The electric-vehicle maker’s first-quarter deliveries were pretty awful, missing estimates by a long way. But it’s not a blip—the stock has now fallen 33% this year, the S&P 500’s second-worst performer in 2024 behind Humana. That’s hardly magnificent.

The adjective’s use to describe the other six is also looking more shaky—for Apple in particular, which has dropped 12% this year. The Mag 7’s outperformance began to fade in March as a market-cap-weighted composite index of the stocks rose 1.6% compared with the S&P 500’s 3.1% jump.” – Callum Keown, European Deputy Bureau Chief, Barron’s

Why Know This?

There are four things to remember. The first is that significant declines in value are possible from time-to-time. I am not suggesting VOO is a bad investment. It is a good one. However, you must be ready for significant declines if several of the top ten assets fall out of favor during bear markets or when bad news strikes.

Secondly, VOO and most similar funds, has a dividend yield of 1.34%. Few retirees can live off of that type of income in retirement. If you have a one-million-dollar portfolio invested in VOO, then your annual income won’t be much more than $13,400. That plus Social Security won’t cover your expenses.

Thirdly, if you own multiple funds, be careful to look at the top ten investments in each one. Far too many investors but a couple of different funds with clever names that contain the top ten found in VOO. You can quickly see the top ten using Seeking Alpha.

Finally, some investors hold both ETFs and mutual funds or individual stocks. If you love MSFT, which is a good investment, and you also own VOO, you have dramatically increased your overall ownership of MSFT. Don’t ignore the risks.

Full Disclosure

Cindie and I do not own shares in VOO or any other S&P 500 fund. We also do not own TSLA shares.