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We often view the S&P 500 as a proxy for the overall stock market. After all, its 500 components together represent about 75% or more of the market's value. But if you own the S&P 500, and you really want the whole market in your portfolio, you need to meet the Wilshire 4500 Index.
For those without any index funds, the Wilshire 5000 Index provides the easiest way to own just about all of the market. But since many of us end up holding S&P 500 shares in our 401(k) accounts, sometimes you may want to just add what you don't own.
The Wilshire 4500 holds stocks that are in the Wilshire 5000, but not the S&P 500. Interestingly, the Wilshire 5000 doesn't contain 5,000 stocks. Its holdings count has ranged between about 3,000 and 7,500 over the years, and currently hovers around 4,000. Thus, the Wilshire 4500 holds around 3,500 companies.
Given all the heavyweight names filling the S&P 500, you might think that the Wilshire 4500 only holds smallish companies. However, the S&P 500 doesn't hold the 500 largest public American companies -- just 500 of the leading ones. (And even that's arguable.)
Last time I checked, beleaguered Eastman Kodak (NYSE: EK ) was still in the S&P 500, with a market cap of just $1.1 billion. Other relatively puny S&P 500 denizens include E*TRADE (Nasdaq: ETFC ) , JDS Uniphase (Nasdaq: JDSU ) , and Titanium Metals (NYSE: TIE ) , which have market caps ranging from $2.5 billion to $3.7 billion.
Meanwhile, the Wilshire 4500 holds plenty of large caps that somehow have not made it into the S&P 500. Mosaic (NYSE: MOS ) , Annaly Capital Management (NYSE: NLY ) , and Las Vegas Sands (NYSE: LVS ) clock in with market caps between $11 billion and $22 billion.
Don't think that the Wilshire 4500 components simply aren't good enough for the S&P 500. Many are still growing; eventually, they'll take their place within the elite benchmark. And even the out-of-favor companies populating the list can offer investors tantalizing bargains. Besides, while membership in the S&P 500 is an impressive achievement, some companies there -- like the aforementioned Kodak -- overstay their welcome.
If you don't want to choose individual stocks on your own, indexes are a terrific way to get into the market. Even Warren Buffett has recommended them for the masses. And even if you do own individual stocks, parking a portion of your long-term money in the overall market can smooth out your portfolio's ups and downs, and ease some of your performance pressure.