The S&P 500 Cult: Breaking Free from the Superman Syndrome

When the S&P 500 delivers strong returns, it can feel almost irresistible to overweight your portfolio in this familiar asset category. Recent positive performance can act like a siren song, leading investors to abandon prudent academic investing strategies, ignore diversification, and chase “hot-stocks” and the allure of instant gratification. Welcome to the S&P 500 Cult—a mindset where emotional biases can overpower academic investing principles and potentially destroy investors’ financial future.

Superman Syndrome: The Illusion of Invincibility

The Superman Syndrome is a cognitive trap where individuals overestimate their ability to predict outcomes, often leading to overconfidence and reckless behavior.1 In investing, this manifests when strong recent performance, particularly in well-known sectors or indices, makes investors feel invincible.2 They may believe they have discovered a formula for success and neglect the potential risks of under-diversification.

In 2024, for example, the S&P 500’s performance was dominated by the "Magnificent Seven" – a group of mega-cap tech stocks that accounted for nearly 50% of the index’s total return, according to S&P Dow Jones Indices.3 With sentiment reaching euphoric levels, as highlighted by Citigroup’s Levkovich indicator, it’s no surprise that many investors felt emboldened to double down on these selections.4 However, history has shown that such concentration in a few stocks or sectors can add risk to a portfolio.

The Hidden Dangers of Overweighting and Under-Diversifying

Overweighting recently high-performing companies or sectors can feel justified during a bull run. But chasing recent performance can backfire. For instance, under-diversifying internationally can leave a portfolio vulnerable to downturns in U.S.-centric markets. A more balanced, globally diversified portfolio, on the other hand, can potentially help mitigate these risks.

Discipline Over Euphoria: The Key to Long-Term Success

A more reliable measure of investing success isn’t found in chasing the latest market darlings but in maintaining the discipline to execute an empirically-tested investment strategy. At Matson Money, we adhere to a prudent investing methodology including global diversification, rebalancing systematically, and sticking to academic investing principles that can help create a prudent foundation for wealth creation. These principles might not deliver the adrenaline rush of riding a tech stock rally, but they can help offer the resilience needed to weather market storms.

The Brain vs. Diversification: A Battle for Wealth Creation

Our brains are often our worst enemies when it comes to investing. Cognitive biases, such as recency bias, familiarity bias, and herding bias, can lead to imprudent decision-making and jeopardize long-term goals.

1. Recency Bias: This occurs when investors place disproportionate weight on recent events, assuming they’ll continue indefinitely.5 When the Magnificent Seven soared in 2024, many investors overlooked the long-term volatility and historical data suggesting that concentrated bets often falter.3
2. Familiarity Bias: Investors tend to favor assets they know well, like domestic stocks, rather than diversifying internationally.6 This comfort zone can lead to overexposure to specific markets and potentially missed opportunities elsewhere.
3. Herding Bias: The fear of missing out (FOMO) drives investors to follow the crowd, amplifying market bubbles.6 By the time euphoric sentiment peaks, as seen in the dot-com and post-pandemic bubbles, many are caught in a downturn.4

At Matson Money, we are committed to helping investors stick to an investing strategy rooted in empirically tested academic investing principles rather than emotionally stimulated factors. While market trends can grab headlines, it’s the academic, methodical approach that can triumph in the long run.

Breaking Free from the S&P 500 Cult

To help escape the S&P 500 Cult, investors can challenge their biases and commit to a globally diversified portfolio aligned with their goals and risk tolerance. This means resisting the allure of recent performance and embracing the empirically tested academic principles of investing. By prioritizing discipline over emotion, you can build a portfolio that can withstand market whims and aligns with your long-term financial goals.

In investing, as in life, being part of the crowd rarely leads to extraordinary outcomes. Breaking free from the S&P 500 Cult requires courage, clarity, and commitment - traits that are far more valuable than any short-term market gain.

Sources:

1. Sizelove, Valerie L. 7 Signs You Have A Superwoman Complex – And How to Fix It. FairyGodBoss. Published September 11, 2019. Retrieved 21 January 2025 from https://fairygodboss.com/career-topics/superman-complex.
2. Eradicating The Superman Syndrome: How to achieve emotional stability in Trading. InvestaDaily. Published October 7, 2020. Retrieved 21 January 2025 from https://www.investagrams.com/daily/2020/10/eradicating-the-superman-syndrome-how-to-achieve-emotional-stability-in-trading/.
3. Magnificent Seven dominates S&P 500 driving more than half of the 2024 gains. MSN. Published January 6, 2025. Retrieved 24 January 2025 from https://www.msn.com/en-us/money/savingandinvesting/magnificent-seven-dominates-s-p-500-driving-more-than-half-of-the-2024-gains/ar-AA1x3iP3.
4. Levisohn, Ben. The Stock Market Needed a Washout. What Sentiment Says About What Comes Next. Barron’s. Published December 20, 2024. Retrieved 21 January 2025 from https://www.barrons.com/articles/stock-market-washout-what-comes-next-9abcd159.
5. Hayes, Adam. Recency (Availability) Bias: What it is, How it Works. Investopedia. Published August 15, 2024. Retrieved 22 January 2025 from https://www.investopedia.com/recency-availability-bias-5206686.
6. Hayes, Adam. Behavioral Finance: Biases, Emotions and Financial Behavior. Investopedia. Published August 20, 2024. Retrieved 22 January 2025 from https://www.investopedia.com/terms/b/behavioralfinance.asp.

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