What indices hide: An average number, very different realities

The S and P five hundred is five hundred companies. So you think you are buying five hundred roughly equal pieces.

In reality, the ten biggest weigh around a third of the index. The other four hundred and ninety share the rest.

That is the effect of weighting by size. A few giants end up pulling the whole thing.

When those ten rise, the index rises. When they stumble, it does not matter what the others do.

The year two thousand twenty-three showed it spectacularly. People talked about the magnificent seven.

Seven American tech giants. Their rise made up most of the index's rise that year.

The S and P five hundred gained about twenty-four per cent. Its equal-weighted version, about half that.

So an average company in the index did far less than the index itself. The average described almost nobody.

Remember the lesson: an index going up does not mean most shares are going up.

In the app, this chapter is animated and narrated, card by card. Start free trial.

Second hidden thing: dividends. The number you are shown is often a price index.

It follows prices, and forgets dividends paid along the way. The total return index reinvests them.

Over one year, the gap looks small. Over thirty years, it becomes huge.

For the example: ten thousand euros, a four per cent price rise a year. After thirty years, thirty-two thousand four hundred and thirty-four euros.

Add three per cent of dividends reinvested each year. Seventy-six thousand one hundred and twenty-three euros.

More than forty-three thousand euros apart. Dividends are not a detail: they make up a large part of the result.

Third hidden thing, and this one is inside us: home bias.

A French saver mostly buys French shares. A Japanese one, Japanese shares. Everyone thinks their country is the market.

Yet France weighs less than five per cent of the value of world stock markets. The United States, more than half.

Putting almost everything in your own country is a very concentrated bet. On one economy, one currency, a handful of companies.

And this bet adds to another: your salary, and often your home, already depend on that same country.

Why do we do it? Because the familiar reassures. We buy the names we see in the street.

Concentration, forgotten dividends, borders: three things a single number does not say.

Before trusting an index, look at what it really contains, and what it leaves out.