By Scott Bishop and Tom Mountain
As discussed in our recent article, we enjoy working with Boeing employees to work toward favorable outcomes in retirement. We believe it is important for every employee to make investment decisions with a clear understanding of the risks and implications as they relate to your personal lifestyle goals. We often educate our clients about index funds such as the S&P 500, as there are some common misconceptions about how these funds work.
S&P 500: Funds Distribution
When you buy into the S&P 500, what do you think you own? Do you think that 1/500th of each dollar you invest is distributed equally into one of the 500 companies in the fund? That is not how it works. The S&P 500 is weighted by market capitalization. (The market cap of a company is the total value of its outstanding shares.) Consequently, most of your money goes into the largest companies in the fund. Let’s take a look at how the math worked out in 2020.
Here are some figures that illustrate the performance of funds invested in the S&P 500. Of all companies in the S&P 500, the top 3 are Apple, Microsoft, and Amazon. In 2020, these three companies accounted for more than 53% of the index’s 18.4% total return; Apple gained 82.3%, Amazon gained 72.6%, and Microsoft gained 42.5%. Morningstar Research found that 28% of the S&P 500’s collective value is contained in its top 10 holdings. If you exclude the 30 stocks with the highest market capitalization, then the S&P 500 would actually have fallen by 0.03% in 2020 so the fund is not as diversified as one would think.
Cost Of Index Funds
One common appeal to investing in index funds is their relatively low expense ratios, as opposed to managed funds. The Boeing Voluntary Investment Plan (VIP) has an S&P 500 index fund with an expense ratio of 0.06% (or 6 basis points). Of course, low cost does not automatically mean that an investment is the best choice, and many factors must be considered. In the years leading up to retirement, we will often reevaluate risk levels.
Performance Of Index Funds
The age old expression in financial services has always been that 80% of the actively managed funds underperform the index so why not just buy the index? While this may be true, there are a few filters that lead us to the outperformers, net of expenses. Even a small annual outperformance can lead to a significant portfolio enhancement leading up to and throughout retirement. It is especially important as you get to within 5 years of retirement to evaluate the risks in your 401K vs the options that are available to you potentially outside the plan through a Rollover to an IRA.
How We Can Help
If you are starting to invest in a Boeing VIP or Salaried Savings plan, or if you would like a professional evaluation of your retirement portfolio to see if your current mix of funds is appropriate for your goals and season of life, we are happy to help. Our team has served numerous Boeing employees, and we have spent extensive time researching the specifics of their company’s retirement plans. Please feel free to give us a call at (562) 432-3783 or send an email to info@mbpwm.com to schedule a complimentary introductory consultation.
About Us
Mountain-Bishop Private Wealth Management is a full-service independent financial services and investment services firm that has been providing retirement and investment guidance to high-net-worth individuals, business owners, and Boeing employees for more than 25 years. Through our long-term guidance, we strive to help our clients build, protect, distribute, and transfer their wealth, tailoring our services and strategies to address each client’s unique needs so they can bridge the gap between their current financial situation and their long-term goals.
Scott and Tom built their practice on trust and excellence. They focus individually on each client, delivering the personalized touch that is missing with many other firms.
The Financial Consultants of Mountain-Bishop Private Wealth Management are registered representatives with, and securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: (AK, AZ, CA, CO, FL, GA, ID, IL, MI, MO, NC, NJ, NM, NV, OR, PA, SC, UT, VA, WA) SCOTT E. BISHOP CA LICENSE OB55872 THOMAS P. MOUNTAIN CA LICENSE OB55827