The case against owning the index at 22 times earnings

The ten largest companies in the S&P 500 account for close to 40% of the index. Buying the index today is, in substance, an active decision to own a concentrated portfolio of US technology at a forward multiple of around 22 times earnings.

Concentration is not diversification

That may still prove a good decision. The leading companies are extraordinarily profitable. But investors who believe they are diversified should look at the overlap between their index fund, their technology fund and their pension.

What the alternative looks like

The equal-weighted S&P 500 trades at around 16 times. European and UK indices trade at 13 to 14 times. Neither is a guarantee of better returns, but both offer a larger margin of safety.

The point

Index funds remain the right default for most savers. Our argument is narrower: know what the index contains, and do not mistake its recent performance for a law of nature.