Mimic SP500 with 10 stocks

You could do this mathematically (you will obviously need Excel because of the amount of data involved) -

1.) Download monthly data for the past 5 years for each of the member stocks and the index 2.) Correlate the month over month returns (not prices) of each stock with the index 3.) The 10 stocks with the highest correlations are the 10 you should pick to most closely mimic the index

• Capt K

Of course, the other, non-empirical way is to try to pick 10 member stocks in 10 different industries to approximate the indexing effect of the S&P500.

Also, you don't need to have access to Bloomberg or anything to get the data you need for my prior post. You can get the data at MSN Money. Install their Excel plugin.

• Capt K

you can just buy sector etf's...

Yea, why wouldn't you just buy an ETF or a standard index fund...it is certainly the most cost-effective method of mimicking an index

Assuming you are young you should just speculate like me. Mediocrity and average returns are boring. Decide whether you would like to be a LT value investor or a short-term velocity of money kinda guy (or a hybrid).

You could always just leave your money under your mattress...

If you're going to leave money under the mattress i'd convert it to euros first...ah...maybe too late now though? Yuan. I still believe in the Yuan.

The question actually sounds more like an assignment for school.

I'm certainly no expert, but assuming you're simply trying to mimic performance of the S&P 500, and that you have to purchase stocks in equivalent increments, it seems like your best bet might be to buy up the 10 largest cap stocks in the index. I believe the top 10 members drive ~20% of the total index.

It also seems like there would be a host of issues associated with relying on historical correlations, not to mention the fact that simply picking based on historical performance ignores the cap weighting of your stocks. Size matters here, since the vast majority of S&P 500 members are too small to drive any meaningful change in the index. You're not necessarily targeting a scenario where each individual stock mimics the S&P any way, but rather one where the group's performance is most closely aligned.

pretty sure the s&p is cap weighted, so just go with largest 10.

look it up

I agree with Capt K... and the reason he may not be able to just buy ETFs is because it is perhaps for a Finance class. Not sure, just guessing.

I'd be curious how well it could mimic the S&P with a 10 stock portfolio. I was under the impression that you need around 30 to fully diversify (or rather, diversify to the point where any more is generally wasted transaction costs) the company's diversifiable risk. Anyone care to comment - I'm genuinely curious.

As an aside, when you try to mimic like this, would you constantly be readjusting the % holdings or just let it ride? If so, how often?