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The Catch Behind a "Timeless" Investing Strategy · Making Cents

• 0:01
  Hey, team, it's Frances.
• 0:03
  Every week, I put out a couple of different newsletters.
• 0:06
  One of them is the Market Memo.
• 0:08
  It's my investing newsletter where you get smart with shares.
• 0:12
  Real talk, real tactics, no spreadsheets required.
• 0:16
  And this week's topic is one that I've had so many emails and DMS and questions about.
• 0:22
  So I thought, okay, let's make the most of things and also turn it into a podcast episode.
• 0:28
  Here you go.
• 0:28
  Has a timeless investing strategy stopped working?
• 0:37
  Hey, team.
• 0:38
  A classic investing strategy is buying into a fund so that you're invested into hundreds of companies at once.
• 0:45
  I recommend it a lot and use it as the core of my own investing strategy because, frankly, it works.
• 0:51
  But lately, I've seen rumblings growing louder that this investing strategy isn't what it used to be.
• 0:57
  And I do see their point, because.
• 1:00
  Pop quiz.
• 1:01
  If you put your money into The S&P 500, the classic index of the 500 biggest companies in the US, how many companies have you just invested into?
• 1:11
  500, right?
• 1:14
  Kinda.
• 1:15
  The problem is the size of the companies in that fund, and they're throwing everything at of whack.
• 1:22
  Right now, 40% of any money you put in there goes into just 10 companies, and they're pretty much all tech and AI.
• 1:31
  So suddenly, your beautifully diversified fund that lets you spread your money around and spread risk between different companies and industries is not doing that suddenly.
• 1:44
  Instead, you're basically investing into AI and leaving yourself exposed to all the risks of having too much of your money in one place.
• 1:53
  You're all in on 10 tech giants with 490 tiny passengers alongside them.
• 2:00
  Is this a problem?
• 2:01
  And if it is, how do we deal with it?
• 2:05
  So I've talked before about how beautiful index funds make it easy to invest.
• 2:10
  Common ones are by country.
• 2:12
  The S&P 500 for the 500 US companies.
• 2:16
  The ASX 200 for the 200 biggest in Australia.
• 2:19
  There are also global funds or tech funds or healthcare funds.
• 2:23
  These funds have a simple rule.
• 2:26
  A computer makes sure they stick to it.
• 2:28
  They invest automatically and keep your fees low.
• 2:31
  Love that.
• 2:33
  But the list of companies is only one half of the recipe.
• 2:37
  The second half of the recipe is the rule for what percentage of your money gets shared between the companies on that list.
• 2:45
  Most index funds, including most of the classic S&P 500 funds, use a rule called cap weighting.
• 2:52
  Cap is just short for market capitalization, which is finance speak.
• 2:57
  For a company's total value, how much that company is worth is its market capitalization.
• 3:03
  So Apple's is measured in trillions, your local listed retirement village operator will be quite a bit less.
• 3:10
  So say Apple is five times the size of another company in the index.
• 3:15
  They will get five times as much of your money.
• 3:18
  It all gets split up in percentages that follow how big the companies are.
• 3:23
  So market darling Nvidia, a truly enormous roaring tech behemoth, doesn't get 1, 500 of your investment money at the time of writing, it would get 8%.
• 3:36
  It dwarfs everything else in the S&P 500.
• 3:40
  Those 10 biggest tech companies are currently taking up 4, 40% of a standard cap weighted S&P 500 fund.
• 3:48
  Tech itself is about a third of the fund they big.
• 3:53
  So is this a ripoff?
• 3:55
  No, just a reflection of the business world right now.
• 3:58
  Here's the thing.
• 3:59
  These companies are currently soaking up your investing money because they're soaking up all the oxygen in the economy.
• 4:06
  Overall, cap weighting isn't used by all funds, but it is the most common tactic.
• 4:13
  And it's the most common tactic for a reason.
• 4:16
  The reason we love investing in index funds is because instead of trying to pick winners and figure out which business is going to win, which is very difficult even for professionals, you basically decide to invest in the economy.
• 4:29
  Overall, you say, well, the economy may go through rough patches, but overall it keeps growing, keeps employing people and keeps making money.
• 4:37
  And, and I would like a piece of that.
• 4:40
  What is dominating the economy right now and getting the business world most excited about future profits?
• 4:46
  Tech and AI.
• 4:48
  Now don't get me wrong, I'm certainly not a tech bro in sheep's clothing.
• 4:52
  AI looks a bit bubbly to me and I think at a certain point it's going to fall.
• 4:57
  But will that be tomorrow, next year, or in five years?
• 5:02
  Don't know.
• 5:03
  Until then it will make a lot of money.
• 5:05
  And even after any fall, I still highly doubt it will disappear.
• 5:08
  Entire tech has had many booms and busts and yet here we all are.
• 5:13
  I wrote this to you from my computer, sent it to you over email.
• 5:17
  You opened it on your phone or computer and you might see something I post on Instagram later today.
• 5:23
  The details change, but tech keeps going.
• 5:26
  And if I'm going to use it so much, then I'd also like a piece of the profits from it while it melts my brain.
• 5:33
  Every time the money world gets weird, I like to look to the past to see what's happened before.
• 5:38
  Because history may not repeat, but it definitely rhymes.
• 5:43
  And tech getting all heavy on us and taking over the index fund party.
• 5:48
  Oh yeah, this has happened Before.
• 5:50
  I said before that cap weighting is actually deliberate and incredibly common.
• 5:56
  That's because you could argue it's the most honest system.
• 5:59
  It reflects the actual economy as the market currently sees things.
• 6:05
  Your fund is dominated by AI currently because it's the dominant force in business right now.
• 6:11
  It's getting trillions in investment.
• 6:15
  Every company on earth is scrambling to figure out what it means to them.
• 6:20
  Your fund isn't distorting reality, it's mirroring it.
• 6:24
  So when has this happened before and with what?
• 6:27
  Time for another pop quiz.
• 6:29
  If you had to guess, what do you think was the hot stock around 1900, the industry that everyone was raving about that took up roughly 63% of the US share market.
• 6:43
  Choo choo.
• 6:44
  It was railroads, because at the time railroads basically were the economy.
• 6:49
  They moved everything, connected everything.
• 6:52
  And with a hot transformative technology that everyone wanted, a piece of, global financial data handily tracked other industries for our parade of champions here.
• 7:01
  Oil, of course dominated in the 1980s.
• 7:05
  Energy took up 28% of the index, and seven of the 10 biggest US companies were oil.
• 7:11
  Tech dominated before the AI era, with the dot com era taking up 33% of the index in the 2000 peak.
• 7:20
  Then we had the dot com crash and through the 2000s, we had banks and energy companies ruling the roost instead of the index funds.
• 7:27
  Rode every one of those waves, made a ton of money for investors, and automatically updated with new companies when a new force began to dominate.
• 7:38
  Every error has a hot industry and every error gets replaced.
• 7:43
  When you index invest, you don't need to see it coming.
• 7:47
  You just automatically have less money going to the fading giants while the rising stars get more and more.
• 7:54
  Now, a small footnote on this.
• 7:56
  Maybe you're just really concerned by the AI boom and don't want all of your money going there.
• 8:01
  And to be fair, this is also why I twitch a little when people tell me they're putting all of their money into the S&P 500.
• 8:09
  That is not true diversification.
• 8:11
  You are putting all of your money into the US market.
• 8:15
  And while it's great at making money, it is just one country's economy.
• 8:21
  Truly spreading your money and spreading your risk means more than one company, more than one industry, and more than one country.
• 8:31
  Because one country can have a recession while others are doing just fine.
• 8:37
  So firstly, let me once again tip my hat at the global funds that make it so easy to spread your money around.
• 8:44
  And secondly, if you're still bothered by this AI domination, what can you do about it?
• 8:50
  I think you can still have a very lazy, very successful investing strategy while reducing this AI risk from your future, if that's what you want.
• 8:59
  So that's what I'll take a deep dive into next week do.
• 9:02
  Make sure that you're subscribed to get it into your inbox automatically.
• 9:05
  You can get on the list for the Market Memo each week in your inbox by going to Franciscook Co NZ/Invest.
• 9:13
  Until next time.
• 9:14
  Have a great day.
• 9:15
  This podcast can only give you general information about how things work in most situations.
• 9:20
  It's not individual financial advice.
• 9:23
  If you're after that, a financial advisor is always the best bet.