October 18, 1999

The contribution of individual stocks and or industry groups to an index like the S&P500 is calculated by multiplying the weight of the industry group by the industry return. By ranking the weighted returns in descending order, one can tally the cumulative returns and calculate the minimum number of industries needed to replicate the performance of the S&P500. For example, during the first three quarters of 1999, eleven industry groups: Alcoholic Beverages, Communications Equipment, Computer Software and Services, Computers Hardware, Computers Networks, Computers Peripheral Equipment, Electronic Semiconductors, Electrical Equipment, Financial, Diversified, Manufacturer, Diversified Industrials and General Merchandise Retail Stores, replicate the return of the S&P500. But since the groups make up only 31.8% of the index follows that the eleven industries appreciated on average better than 20% for the first three-quarters of the year. Clearly, anyone who had just invested in those industries would have enjoyed excellent performance during the first three-quarters of the year. One way to have gotten there was to have bet on technology alone. However, most portfolios would be more diversified than that.

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