You Bought an Index Fund… Ten Companies Account for Almost Half of It

“Liking is probably the best form of ownership, and ownership the worst form of liking.”

~ José Saramago

There’s a dirty little secret hiding inside your supposedly diversified index fund. You may not have picked the AI trade, but your index fund probably made that decision for you. (Source: Shutterstock)

Note from Addison: Today we continue a series we’ve been calling “Financial Reckoning and the Trifecta Solution.” It’s perhaps entertaining enough to parse the debt crisis that’s been festering our entire adult lives. But we thought we’d venture a few solutions, too. Not that the political status quo is going to change on Capitol Hill any time soon.

You may have owned an S&P 500 Index fund for 20 years without ever purchasing an individual technology stock.

You selected the fund because it holds shares in hundreds of American companies. You expected the money to be spread across many different businesses.

But our original research shows that the 10 largest companies account for approximately 40% of the index, based on the measurement in Final Reckoning.

If your retirement account follows that index, a substantial portion of your savings depends on the share prices of those 10 businesses.

You didn’t decide how much money they should spend on artificial intelligence.

Their executives did.

The Companies Behind Your Statement

The largest index holdings include technology companies committing enormous sums to AI infrastructure.

Their managers are buying processors, constructing facilities and arranging power for the equipment.

Those purchases may produce valuable services and substantial future earnings.

But the investments require money today.

A company can spend heavily on a promising technology and still disappoint its shareholders if the expected profits fail to justify the price investors paid for the stock.

Nobody wants to be the tech executive who skimped on AI spending. The industry’s biggest companies keep raising their investment budgets, building data centers and buying chips at a breathtaking pace. (Source: Zapier)

During the dot-com boom, investors bought shares in businesses supplying the equipment needed to build the internet.

Cisco Systems (CSCO) and Intel (INTC) subsequently suffered severe share-price declines, according to the comparisons in our original research, even though internet use continued expanding.

Your index fund doesn’t decide whether a company has spent too much merely because the company has become one of the index’s largest holdings.

It follows its investment rules.

The Other Statement

The Trifecta Solution addresses another document that matters to anyone approaching retirement: the Social Security benefit statement.

Its proposed reforms include gradual changes to retirement eligibility and additional contributions from very high earners.

Those decisions would require Congress to change the law.

If legislators increase the retirement age, you may have to wait longer for benefits. If they change payroll-tax rules, the amount withheld from some workers’ wages may change.

There’s no shortage of politicians willing to defend Social Security. Finding one willing to discuss the difficult reforms needed to keep it sustainable is another matter entirely. (Source: Social Security Administration)

The Trifecta doesn’t establish a completed financing arrangement that guarantees your existing benefits.

It proposes one for Congress to negotiate.

The Citizen Investment Account

The same document also proposes allowing residents to buy small-denomination bonds financing public utility infrastructure.

Its suggested minimum investment is $25, with proposed yields of 5% to 6%.

Those are proposed terms, not an existing bond offering.

Before investing, you’d need an offering document identifying the issuer, the source of repayment, the maturity and the conditions under which investors might lose money.

The proposal also calls for public dividends that residents could direct toward personal retirement investments.

That would require an operating public fund with distributable income and rules governing the payments.

Your existing 401(k) already contains securities that align with the fund’s mandate.

The Trifecta proposes adding another investment choice.

We wouldn’t buy either one without examining the obligations behind it.

~ Addison

P.S. Washington has a talent for making problems look manageable right up until the bill arrives. Meanwhile, AI is rewriting the rules of business, and the stock market is trying to figure out what comes next.

Three very different forces, all moving at once, and they could start to converge as soon as November 16.

That’s why Strategic Fortunes chief strategist Ian King, Money & Markets chief investment strategist Adam O’Dell and I have joined forces for the first time in a new service called The Alliance. We’re each covering one of these forces and the opportunities that emerge from it.

Learn how we’re preparing for November 16 and the ever-changing market landscape here.