Steps
- Choose an index you like. You could choose S&P 500, for example. It is the most followed index in the US stock market.
- Try to get a list of the biggest components of that index by size. In other words, what are the biggest companies in the S&P 500? (Decide how you are going to determine size by the way. Are you going to go with market capitalization?
- Pick the biggest ten companies. General Electric and Exxon Mobile will most likely be in every index you could choose.
- Buy them for your own portfolio.
Tips
- You could play with the percentage weight of each company in the portfolio for your own taste.
- You could pick the biggest ten, five, or two companies depending on your preference. Less companies mean more volatility to your portfolio.
- To get closer return to the index fund, invest more money in more companies.
- The following companies represent 10% of S&P500: Exxon Mobil, General Electric, Microsoft, Citigroup.
Warnings
- This method will overweight you for large caps, giving you no exposure to small caps, mid caps, and to 490 of the smallest large caps companies.
- This will result in the opposite of diversification for your money and your money will be at great risk.
- No one can get the exact performance of the index tracked .However, if you invest in a mutual fund, you will get the return of the index, less whatever small percentage that fund charges you in fees. This is your best bet.
- Caution must be taken when changing the weight of the companies to make them different than the index.
- This technique is really playing with fire.
- Instead you should consider investing in a index fund or an exchange traded fund. Both of these solutions are far more desireable and much better.
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