Investing in 2010 was even easier than it looked: All you really needed to do was own 12 stocks out of the 630 that make up the three major indices. But if you didn’t have them in your portfolio, you whiffed big time.
While the Standard & Poor’s 500 gained 11.5 percent, the Dow Jones industrials rose 10 percent and the Nasdaq was up 15.8 percent, most of the gains were concentrated in just a handful of stocks.
Based on how much the stocks rose, their market caps and the impact they have on their respective indices, one needed only to buy Apple, Caterpillar and a handful of other big-name companies to realize the bulk of last year’s market gains, according to research from Tobias Levkovich, chief market strategist at Citigroup. (Figures were as of Dec. 30).
For the S&P, just 10 stocks accounted for more than 25 percent of the index’s gains for the year. Among them, Apple and its 53 percent yearly gain accounted for 7.9 percent, or 1 percentage point of the total return growth.
The other nine names in the top 10 of index contribution were Citigroup, Oracle, Berkshire Hathaway (B shares), General Electric, Ford, Caterpillar, AIG, Chevron and Conoco Phillips.
Apple had an even huger impact on the Nasdaq.
The computer giant accounted for fully 44.5 percent of the 100-stock tech barometer’s gains.
“Therefore, not having owned just 1% of the index would have led to massive underperformance,” Levkovich points out.
On the Dow, Caterpillar was joined by Dupont and McDonald’s in accounting for an outsized proportion of the bluechip gains.
The upshot is that, despite all the talk about correlation, investors didn’t really have to search far and wide for individual stocks to get big returns. They just needed a few best-of-class types to make a nice return on a big year for Wall Street.
The research also raises questions about the wisdom of big-tent mutual funds and ETFs versus careful stock-picking. After all, a gain is a gain when it comes down to percentages, but having an index fund with one Apple and a bunch of other low-performance losers hasn’t been very effective.
“With such massive gains contributed by such a small handful of stocks within each index, the nimble investor throughout 2010 would have been able to realize solid outperformance of their benchmark,” Levkovich wrote in a note to clients. “As these results show, having owned just 10% of each index would have led to solid outperformance.”
Companies mentioned in this post.
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