Want More Personal Financial Planning Tips ? From retirement planning strategies to adding financial planning to your practice , visit https :// store . calcpa . org / ? tab = catalog & q = pfp for a listing of upcoming courses to boost your knowledge . And for more resources from our Personal Financial Planning Committee , visit calcpa . org / members / committees-sections / personal-financial-planning . doesn ’ t care about that . Before the financial crisis , financial services stocks had steadily become the largest weighting in the S & P 500 . Before the tech bubble in 2000 and prior to the most recent tech slide , the S & P 500 had been increasing tech exposure year after year . As of the end of 2022 , for example , the Vanguard S & P 500 index fund had the following characteristics :

• Top 10 holdings : 25.2 percent .

• Industry weights : Information technology was largest industry with 25.8 percent . Any analysis of that portfolio would lead to the conclusion that there is too much individual stocks and sector risk and that perhaps the diversification is not what would be expected .

So , what ’ s the solution ? Do investors try to find those illusive stock pickers who can beat the market ? Or is there a more diversified or rational way to “ index ” the market , while still keeping costs low and reducing the chance of having an active manager reduce performance ?

With advances in data technology , it has become much easier to dissect historical market data and evaluate different ways of measuring market returns . That data has been used to create more diversified methods of indexing the U . S . stock market . While the expenses are often a little higher than the standard capitalization weighted index products , the costs are still much lower than virtually all actively managed products .

Here are some index-like alternatives out there : Equal Weight Indexing : This simply takes all 500 stocks in the S & P 500 and divides them equally by weight . This eliminates individual stock concentration risk . Sector concentration will vary based on the number of companies which belong to a given sector .

Fundamental Indexing : Earnings weighted allocates among the index holdings by the relative contribution of their earnings , dividends or other financial measurements . Fundamental indexing helps reduce the risk of a portfolio being overweighted in stocks at valuation extremes .

Stratified Indexing : Stratified weighting allocates stocks evenly among all the industry sectors and subsectors , and then evenly among the stocks in those sectors . This approach eliminates both individual stock and sector concentration .

Each of these approaches has its advantages and disadvantages . The good news for investors and advisers is that there are lots of ways to reduce the risks and costs of traditional active management — without having to accept the diversification problems inherent in capitalization weighted index strategies .

Bud Green , CIMA , AIF , is managing director of Fortress Wealth . Glenn Freed , Ph . D ., CPA ( Florida ) is a planning strategist at Fortress Wealth Management and chair of the CalCPA PFP Committee . You can reach them at green @ fortress-wealth . com and Glennfreed @ Fortress-wealth . com .

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