Missing Takeoff
LIKE MOST READERS of this site, I���m committed to index fund investing. Still, even though I know I���d have little chance of beating the market as a stock-picker, I���m periodically tempted to buy individual stocks. When a former mentor who���s a brilliant strategist joined Moderna in May 2020, I strongly considered buying shares. Given where the economy was at the time, I passed on buying the company���s shares (symbol: MRNA) and stuck to my standard S&P 500-index fund investing. In hindsight, this was a mistake.
As a daily viewer of CNBC, it���s been hard to ignore the performance of Moderna over the past 16 months. It has increased more than 300% in 2021 and yesterday it was up more than 17%.
As I watched CNBC yesterday, I said to myself, ���It���s a bummer I didn���t buy shares last year, but at least I���m getting some upside now that Moderna is in the S&P 500.��� I spent a little time analyzing this attempt at rationalization���and the results weren���t consoling.
Moderna was trading at $321 per share on July 21, the day it joined the S&P 500. On that date, it made up 0.26% of the index. If you had $10,000 invested in an S&P 500 fund, you indirectly owned $26 worth of Moderna stock���about one-twelfth of a share���when it joined the index.
Since joining the S&P 500 index, Moderna stock has climbed some 50% to more than $484 per share at yesterday���s close. Assuming the same $10,000 investment, you have made about $13 on Moderna over the past few weeks. You read that right: Despite Moderna���s substantial price appreciation, the money you made would barely buy avocado toast.
My conclusions? First, you won���t get rich quickly through index fund investing. While you���re well-diversified against the risk of any one stock cratering, you���ll also see limited upside from a superstar like Moderna.
Second, Moderna has risen to have a market capitalization of close to $200 billion, but it still has a relatively small S&P 500 weighting. The top five companies in the index���Apple, Microsoft, Amazon, Facebook and Alphabet���comprise more than 20% of the index, so even moderate price swings by these stocks will impact the index much more than significant changes in a company of Moderna���s size.
Finally, if you periodically get well-informed gut feelings about individual stocks, it may be worth setting aside a small pool of funds to buy these stocks. Such a mini-portfolio won���t be well-diversified. But you���ll likely have fun with it and, at worst, some losses���and those losses will serve as a reminder to stick with your index funds.
As a daily viewer of CNBC, it���s been hard to ignore the performance of Moderna over the past 16 months. It has increased more than 300% in 2021 and yesterday it was up more than 17%.
As I watched CNBC yesterday, I said to myself, ���It���s a bummer I didn���t buy shares last year, but at least I���m getting some upside now that Moderna is in the S&P 500.��� I spent a little time analyzing this attempt at rationalization���and the results weren���t consoling.
Moderna was trading at $321 per share on July 21, the day it joined the S&P 500. On that date, it made up 0.26% of the index. If you had $10,000 invested in an S&P 500 fund, you indirectly owned $26 worth of Moderna stock���about one-twelfth of a share���when it joined the index.
Since joining the S&P 500 index, Moderna stock has climbed some 50% to more than $484 per share at yesterday���s close. Assuming the same $10,000 investment, you have made about $13 on Moderna over the past few weeks. You read that right: Despite Moderna���s substantial price appreciation, the money you made would barely buy avocado toast.
My conclusions? First, you won���t get rich quickly through index fund investing. While you���re well-diversified against the risk of any one stock cratering, you���ll also see limited upside from a superstar like Moderna.
Second, Moderna has risen to have a market capitalization of close to $200 billion, but it still has a relatively small S&P 500 weighting. The top five companies in the index���Apple, Microsoft, Amazon, Facebook and Alphabet���comprise more than 20% of the index, so even moderate price swings by these stocks will impact the index much more than significant changes in a company of Moderna���s size.
Finally, if you periodically get well-informed gut feelings about individual stocks, it may be worth setting aside a small pool of funds to buy these stocks. Such a mini-portfolio won���t be well-diversified. But you���ll likely have fun with it and, at worst, some losses���and those losses will serve as a reminder to stick with your index funds.
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