Is the S&P 500 still diversified?

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AlwaysLearningMore
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Re: Is the S&P 500 still diversified?

Post by AlwaysLearningMore »

Charles Joseph wrote: Sun Jun 04, 2023 12:20 pm
burritoLover wrote: Sun Jun 04, 2023 12:00 pm
Charles Joseph wrote: Sun Jun 04, 2023 10:24 am
burritoLover wrote: Sun Jun 04, 2023 7:42 am The US market has become a gambler's paradise. It's more investors trying to ride the wave of whatever the latest narrative is (currently AI), rather than any sane pricing of future earnings.
The "latest narrative" merely provides a descriptive account of a connected set of events which informs the market's efforts to discount the current value of future company cash flows. That's what the market does. It's what the market is: it's a discounting mechanism.
...The point is, if you invest in a market-cap weighted fund, things can get concentrated at the top. It isn't a thing to react to, it is something you have to live with by choosing a narrow basket of stocks (large caps) of a single country...
Things always are and always have been concentrated at the top. Studies show something like 4% of stocks account for 94% of market returns since the 1920s. The other 96% of stocks have earned the equivalent of T-Bills (these percentages are from memory but this is close!). That seems to be an essential characteristic of the market. Why would I want to miss out on those gains by doing something other than market-cap weighting?
Supporting your premise: "Wealth Creation in the U.S. Public Stock Markets 1926 to 2019"

https://ssrn.com/abstract=3537838
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alluringreality
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Re: Is the S&P 500 still diversified?

Post by alluringreality »

Charles Joseph wrote: Sun Jun 04, 2023 12:20 pm Things always are and always have been concentrated at the top. Studies show something like 4% of stocks account for 94% of market returns since the 1920s. The other 96% of stocks have earned the equivalent of T-Bills (these percentages are from memory but this is close!). That seems to be an essential characteristic of the market. Why would I want to miss out on those gains by doing something other than market-cap weighting?
I'm not sure what the 94% is intended to represent, but the rest of this is generally consistent with the following link. The way their math works, primarily what would matter for an individual's personal timeline is whether or not an individual stock outperforms Treasury bills across the holding period. Buying the top 10% at market weight may not increase the likelihood of buying stocks to out-perform T-bills, but the management cost is limited. Their presentation has elements of equal weighting and market weighting. I'm not sure if there's a cost-effective way to easily replicate how their data is presented. Essentially to closely follow their layout, something like equal weight purchases with direct indexing might come close to how they're representing the past information. I'm not sure if such a product exists, but it's probably safe to say that current solutions might be limited in scope or complicated (I think only a portion of stocks are currently offered for fractional share purchases), or the current cost might be up for debate. Using an equal weight fund isn't exactly the same as how their data is presented, since the skewness focus of their presentation does not really result in the sort of rebalancing back to equal weighting that would happen with an equal-weight S&P 500 fund. Essentially individual stocks vary greatly in proportion in their data, but purchasing at market weight is not necessarily a fundamental feature of their discussion. I'll merely suggest that their skewness presentation may be more consistent with purchasing at equal weight and then receiving individual stock returns, and I'm not sure if there's currently a cheap way to buy similarly.
https://wpcarey.asu.edu/department-fina ... sury-bills
Last edited by alluringreality on Mon Jun 05, 2023 7:39 am, edited 3 times in total.
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AlwaysLearningMore
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Re: Is the S&P 500 still diversified?

Post by AlwaysLearningMore »

TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
Perhaps because some of the laggards eventually become the stars?
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Logan Roy
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Re: Is the S&P 500 still diversified?

Post by Logan Roy »

If they're the best businesses, as markets get more efficient, they should weight them higher. The S&P and Warren Buffett are basically in agreement.

I don't think the diversification argument cuts it. BRK is a whole public, private and multi-asset portfolio, but so are companies like Apple. Their business stretches multiple sectors and revenue streams, and they make enough acquisitions to be small-cap and VC funds themselves. The fact Apple and Microsoft are under a single ticker doesn't mean it's anything like investing in a handful of mid-cap tech stocks.
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TheTimeLord
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Re: Is the S&P 500 still diversified?

Post by TheTimeLord »

toddthebod wrote: Sun Jun 04, 2023 1:31 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
AAPL was added to the index in 1982. It has grown 1000x since then. Would you rather have invested in AAPL in 1982 or in 2022?
First I don't know if it was added as 1 of the bottom 100 stocks, second if it was considering how small the weighting would have been would things have really changed that much if the index waited until it would have been in the top 400? Let me put this another way, would an S&P 400 index really perform that differently from the S&P 500 index?
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AlwaysLearningMore
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Re: Is the S&P 500 still diversified?

Post by AlwaysLearningMore »

TheTimeLord wrote: Sun Jun 04, 2023 1:50 pm
toddthebod wrote: Sun Jun 04, 2023 1:31 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
AAPL was added to the index in 1982. It has grown 1000x since then. Would you rather have invested in AAPL in 1982 or in 2022?
First I don't know if it was added as 1 of the bottom 100 stocks, second if it was considering how small the weighting would have been would things have really changed that much if the index waited until it would have been in the top 400? Let me put this another way, would an S&P 400 index really perform that differently from the S&P 500 index?
Are you discounting the rising stars? Your premise seems to me that the bottom 100 will always remain at the bottom.
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deepvalleys
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Re: Is the S&P 500 still diversified?

Post by deepvalleys »

Tech heavy? I guess if everyone suddenly stop using smartphones, the internet and PCs, the index will crash?
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Vulcan
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Re: Is the S&P 500 still diversified?

Post by Vulcan »

No, but VTWAX is.
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TheTimeLord
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Re: Is the S&P 500 still diversified?

Post by TheTimeLord »

AlwaysLearningMore wrote: Sun Jun 04, 2023 1:40 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
Perhaps because some of the laggards eventually become the stars?
And some of the laggards become Dish Network and fall out of the index. So what happens to the market cap and weighting of a laggard? We will see tomorrow but I think Palo Alto Networks market is around $66B and I don't think that will land them in the bottom 100 when they are added tomorrow since the market cap of FMC is about $14B. Maybe I am missing something but I just don't see how a stock that is a 1 or 2 tenths of a percent of an index is a game changer.
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toddthebod
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Re: Is the S&P 500 still diversified?

Post by toddthebod »

TheTimeLord wrote: Sun Jun 04, 2023 1:50 pm
toddthebod wrote: Sun Jun 04, 2023 1:31 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
AAPL was added to the index in 1982. It has grown 1000x since then. Would you rather have invested in AAPL in 1982 or in 2022?
First I don't know if it was added as 1 of the bottom 100 stocks, second if it was considering how small the weighting would have been would things have really changed that much if the index waited until it would have been in the top 400? Let me put this another way, would an S&P 400 index really perform that differently from the S&P 500 index?
No, an S&P 400 would not be meaningfully different than an S&P 500, just like an S&P 500 is not meaningfully different than a total U.S. market fund. But at some point you have to decide how diversified you want to be, and since it's approximately free to invest in total market these days, why choose less?
AlwaysLearningMore
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Re: Is the S&P 500 still diversified?

Post by AlwaysLearningMore »

TheTimeLord wrote: Sun Jun 04, 2023 2:02 pm
AlwaysLearningMore wrote: Sun Jun 04, 2023 1:40 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
Perhaps because some of the laggards eventually become the stars?
And some of the laggards become Dish Network and fall out of the index. So what happens to the market cap and weighting of a laggard? We will see tomorrow but I think Palo Alto Networks market is around $66B and I don't think that will land them in the bottom 100 when they are added tomorrow since the market cap of FMC is about $14B. Maybe I am missing something but I just don't see how a stock that is a 1 or 2 tenths of a percent of an index is a game changer.
There is migration upwards and downwards. Year to year returns are based upon the mix at that time.

https://www.youtube.com/watch?v=kfMFDcuDKYA
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TheTimeLord
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Re: Is the S&P 500 still diversified?

Post by TheTimeLord »

AlwaysLearningMore wrote: Sun Jun 04, 2023 1:56 pm
TheTimeLord wrote: Sun Jun 04, 2023 1:50 pm
toddthebod wrote: Sun Jun 04, 2023 1:31 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
AAPL was added to the index in 1982. It has grown 1000x since then. Would you rather have invested in AAPL in 1982 or in 2022?
First I don't know if it was added as 1 of the bottom 100 stocks, second if it was considering how small the weighting would have been would things have really changed that much if the index waited until it would have been in the top 400? Let me put this another way, would an S&P 400 index really perform that differently from the S&P 500 index?
Are you discounting the rising stars? Your premise seems to me that the bottom 100 will always remain at the bottom.
My premise is more they really matter much until they are out of the bottom 100 because of their weighting so I am asking what is their true value or effect on the index. Thus the question about an S&P 400 vs S&P 500. I guess we can compare the returns from VOO, VTI, VONE and VTHR.
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TheTimeLord
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Re: Is the S&P 500 still diversified?

Post by TheTimeLord »

toddthebod wrote: Sun Jun 04, 2023 2:05 pm
TheTimeLord wrote: Sun Jun 04, 2023 1:50 pm
toddthebod wrote: Sun Jun 04, 2023 1:31 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
AAPL was added to the index in 1982. It has grown 1000x since then. Would you rather have invested in AAPL in 1982 or in 2022?
First I don't know if it was added as 1 of the bottom 100 stocks, second if it was considering how small the weighting would have been would things have really changed that much if the index waited until it would have been in the top 400? Let me put this another way, would an S&P 400 index really perform that differently from the S&P 500 index?
No, an S&P 400 would not be meaningfully different than an S&P 500, just like an S&P 500 is not meaningfully different than a total U.S. market fund. But at some point you have to decide how diversified you want to be, and since it's approximately free to invest in total market these days, why choose less?
As I understand it, this thread is about the S&P 500 being top heavy and I was attempting to point out just adding more stocks to a market cap weighted index doesn't seem to do much in the way of diversification because of the weightings.
Last edited by TheTimeLord on Sun Jun 04, 2023 2:14 pm, edited 1 time in total.
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toddthebod
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Re: Is the S&P 500 still diversified?

Post by toddthebod »

TheTimeLord wrote: Sun Jun 04, 2023 2:11 pm
toddthebod wrote: Sun Jun 04, 2023 2:05 pm
TheTimeLord wrote: Sun Jun 04, 2023 1:50 pm
toddthebod wrote: Sun Jun 04, 2023 1:31 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
AAPL was added to the index in 1982. It has grown 1000x since then. Would you rather have invested in AAPL in 1982 or in 2022?
First I don't know if it was added as 1 of the bottom 100 stocks, second if it was considering how small the weighting would have been would things have really changed that much if the index waited until it would have been in the top 400? Let me put this another way, would an S&P 400 index really perform that differently from the S&P 500 index?
No, an S&P 400 would not be meaningfully different than an S&P 500, just like an S&P 500 is not meaningfully different than a total U.S. market fund. But at some point you have to decide how diversified you want to be, and since it's approximately free to invest in total market these days, why choose less?
This thread is about the S&P being top heavy and I was attempting to point out just adding more stocks to a market cap weighted index doesn't seem to do much in the way of diversification because of the weightings.
That's true.
AlwaysLearningMore
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Re: Is the S&P 500 still diversified?

Post by AlwaysLearningMore »

TheTimeLord wrote: Sun Jun 04, 2023 2:07 pm
AlwaysLearningMore wrote: Sun Jun 04, 2023 1:56 pm
TheTimeLord wrote: Sun Jun 04, 2023 1:50 pm
toddthebod wrote: Sun Jun 04, 2023 1:31 pm
TheTimeLord wrote: Sun Jun 04, 2023 12:46 pm According to the link below 401st company in the S&P 500 is FMC Corporation (FMC) and it is 0.036938% of the index, so can anyone explain how the bottom 100 stocks add meaningful diversification?

https://www.slickcharts.com/sp500
AAPL was added to the index in 1982. It has grown 1000x since then. Would you rather have invested in AAPL in 1982 or in 2022?
First I don't know if it was added as 1 of the bottom 100 stocks, second if it was considering how small the weighting would have been would things have really changed that much if the index waited until it would have been in the top 400? Let me put this another way, would an S&P 400 index really perform that differently from the S&P 500 index?
Are you discounting the rising stars? Your premise seems to me that the bottom 100 will always remain at the bottom.
My premise is more they really matter much until they are out of the bottom 100 because of their weighting so I am asking what is their true value or effect on the index. Thus the question about an S&P 400 vs S&P 500. I guess we can compare the returns from VOO, VTI, VONE and VTHR.
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Re: Is the S&P 500 still diversified?

Post by nisiprius »

It. Is. Not. "Concentrated" into a small number of stocks.

Merriam-Webster says that "concentrated" means "rich in respect to a particular or essential element : made less dilute or diffuse
concentrated sulfuric acid
concentrated orange juice.

Does anybody think that the following are examples of correct usage of the word "concentrated?"

1) A table has on it 24 twelve-ounce cans of beer, a total of 288 ounces, and a two kegs containing 1980 ounces of beer each. The kegs represent two containers out of 26, or just 7.7% of the containers. Yet they hold 3960/4248 = 83% of the beer. 7.7% of the containers hold 83% of the beer, so the beer is concentrated into just two containers.

2) Seawater is 96.5% water, 3.5% salts. It is highly concentrated water.

3) The land area in the United States is heavily concentrated into just two states, Alaska and Texas.

4) Netflix has 0.36% of the money in the market while nVIDIA has 1.58%. Netflix is dilute money, nVIDIA is concentrated money.
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Re: Is the S&P 500 still diversified?

Post by alluringreality »

nisiprius wrote: Sun Jun 04, 2023 2:53 pm 3) The land area in the United States is heavily concentrated into just two states, Alaska and Texas.
Dropping heavily from the sentence, this seems a good enough example of the colloquial usage for additional definitions. Considering how Alaska is one of fifty states (2% portion), yet contains a larger percent by area (around 16%), the idea doesn't seem entirely out of line with online definitions. People are questioning if it necessarily makes sense to put more than 5% of a purchase into a few companies, rather than more equally dividing the assets among companies (0.2% of total), so I have to presume usage follows along these lines.
- contained or existing or happening together in a small or narrow space or area : not spread out
- if something exists or happens in a concentrated way, there is a lot of it in one place or at one time
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Re: Is the S&P 500 still diversified?

Post by muffins14 »

I wouldn’t really call these “tech” companies, or rather, I would say they are not some niche or fad.

Apple makes physical products, and has some services that earn them extra revenue

Microsoft, Amazon, and google all sell cloud computing, which is a resource that all other companies rely on

Microsoft also sells business and productivity software, and makes some ad revenue from search

Google also has productivity software and payments products, and makes an obscene amount of ad revenue

Amazon basically taxes all economic activity- they do e-commerce for literally all things, also own major grocery stores, and have a media arm with music and video

The things they all do are sticky, and they do them very well, and they have diverse revenue streams. So I wouldn’t really lump them all together as a monolith
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Re: Is the S&P 500 still diversified?

Post by 20cm »

If Tim Apple announced the imminent release of an EV that was fully autonomous with built-in hair loss curing AI and AAPL immediately pumped to become 95% of the cap-weighted market, would the people who believe that VOO/VTI are not really concentrated in the top stocks because they're cap-weighted extend that belief to believing that a 95% allocation to AAPL is not really concentrated in AAPL because AAPL is 95% of the cap-weighted market?
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Re: Is the S&P 500 still diversified?

Post by toddthebod »

20cm wrote: Sun Jun 04, 2023 4:09 pm If Tim Apple announced the imminent release of an EV that was fully autonomous with built-in hair loss curing AI and AAPL immediately pumped to become 95% of the cap-weighted market, would the people who believe that VOO/VTI are not really concentrated in the top stocks because they're cap-weighted extend that belief to believing that a 95% allocation to AAPL is not really concentrated in AAPL because AAPL is 95% of the cap-weighted market?
What's the cutoff for being too concentrated in one company? 5.1%? 7.3%? Give us a number.
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Re: Is the S&P 500 still diversified?

Post by km91 »

Can't it be true that the S&P is diversified and also a bit concentrated in its top holdings. If this is a concern all an investor needs to do is add some large cap international or overweight small cap to lessen their concentration to the top holdings in the index
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Re: Is the S&P 500 still diversified?

Post by nisiprius »

20cm wrote: Sun Jun 04, 2023 4:09 pm If Tim Apple announced the imminent release of an EV that was fully autonomous with built-in hair loss curing AI and AAPL immediately pumped to become 95% of the cap-weighted market, would the people who believe that VOO/VTI are not really concentrated in the top stocks because they're cap-weighted extend that belief to believing that a 95% allocation to AAPL is not really concentrated in AAPL because AAPL is 95% of the cap-weighted market?
Made me scratch my head and think. It's hard to deal sincerely with such a wild counterfactual, but I think my answer is, yes, it's possible to believe that. But you did have me going for a bit.

It's a little hard to figure out where the money to do that would come from. In the short run, pumping the price of the stock doesn't help Apple directly, although they might see it as an opportunity to issue new stock. But roughly speaking, the reason why the stock goes up is that the investors believe that Apple's earnings are going to go up. It's not one-to-one but there's a relation between the stock market and the economy. If Apple becomes 95% of the stock market, Indeed, they believe that Apple is going to become responsible for perhaps 95% of the total US economy. Or 90% or 98%, whatever. What's clear is that they think most of the people in the United States are going to be working for Apple.

Apple, Inc. began as as Apple Computer Inc. They dropped the "computer" when it was clear that they doing even more in iPod music players and iPhones... Now, they are starting to get into financials with Apple Card. Your example explicitly says assumes that they are going to add healthcare (hair loss cure) and car manufacture to their business activities.

And on their way to becoming 95% of the US economy, they probably would find it all but necessary to get involved in, I don't know, energy and basic materials (operating lithium mines for their batteries) and real estate. Apple Card would become Apple Bank. In order to become 95% of the economy, it would probably need to acquire or destroy Chase and Bank of America and so on. Even at its peak, with thirty businesses, GE wasn't close to being 95% of the economy. In order to become 95% of the economy, in the fantasy scenario yes, I believe Apple would need to acquire or absorb or generally get into every kind of business, and despite being a single company would include and encompass all of the variety activities that now form the S&P 500.

So, no, I'm not quite willing to give up the idea that the market would not be "concentrated" in Apple, because Apple itself would be much less "concentrated" than before.
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Re: Is the S&P 500 still diversified?

Post by seajay »

Charles Joseph wrote: Sun Jun 04, 2023 12:20 pm
burritoLover wrote: Sun Jun 04, 2023 12:00 pm
Charles Joseph wrote: Sun Jun 04, 2023 10:24 am
burritoLover wrote: Sun Jun 04, 2023 7:42 am The US market has become a gambler's paradise. It's more investors trying to ride the wave of whatever the latest narrative is (currently AI), rather than any sane pricing of future earnings.
The "latest narrative" merely provides a descriptive account of a connected set of events which informs the market's efforts to discount the current value of future company cash flows. That's what the market does. It's what the market is: it's a discounting mechanism.
...The point is, if you invest in a market-cap weighted fund, things can get concentrated at the top. It isn't a thing to react to, it is something you have to live with by choosing a narrow basket of stocks (large caps) of a single country...
Things always are and always have been concentrated at the top. Studies show something like 4% of stocks account for 94% of market returns since the 1920s. The other 96% of stocks have earned the equivalent of T-Bills (these percentages are from memory but this is close!). That seems to be an essential characteristic of the market. Why would I want to miss out on those gains by doing something other than market-cap weighting?
Overall you don't miss out, its a fractal function. For example the Dow 30 stocks broadly compares to the S&P 500 stocks.

2020 and the best Dow stock gained 82%, the worst stock lost -34%, equal weighted and of $100 total $3.33 would have been invested in each stock and at year end the best and worst summed $8.28 value relative to $6.66 combined year start value.

With the 500 equal weighted just $0.22 is invested in each stock, so to compare the best 17 and worst 17 stocks should be compared to the single Dow best and worst stocks, so collectively also around $3.33 invested in each of those 17 best (worst) sets combined to end the year at $8.42 value. But yes individually the single best S&P500 best (and worst) stocks were much higher (lower) gains (losses), the Dow missed being in the best single stocks that the S&P500 captured, ... but to similar overall total 'portfolio' return effect.

More stocks, more variance in individual gains/losses, higher gain (loss) extremes, but capital spread more thinly. With cap weighting you let-it-ride, leave gains from the years best, on the best, leave less capital invested in the worst. Often last years losers are next years winners and vice-versa.
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Re: Is the S&P 500 still diversified?

Post by km91 »

nisiprius wrote: Sun Jun 04, 2023 4:56 pm So, no, I'm not quite willing to give up the idea that the market would not be "concentrated" in Apple, because Apple itself would be much less "concentrated" than before.
Apple's business operations might be much less concentrated but your portfolio is certainly much more concentrated, and you have a much higher degree of exposure to Apple specific idiosyncratic risks than you did before. Management blunders, poorly received product launches, poor PR, accounting scandal, management and board politics, etc all become much bigger risks. Even if Apple really did represent 95% of the economy I have a hard time believing a 95% AAPL portfolio doesn't represent a concentration risk and that it couldn't be easily diversified with more weight to other domestic stocks or by adding international
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Re: Is the S&P 500 still diversified?

Post by 20cm »

nisiprius wrote: Sun Jun 04, 2023 4:56 pm It's a little hard to figure out where the money to do that would come from.
The money doesn't come from anywhere. When NVDA's market cap went up by $200B+ last week, there wasn't $200B+ that came into the stock from somewhere. The market cap is set by the marginal buyer. If enough buyers are hysterical enough, they can drive the market cap of a company well past any valuation it realistically has any business being at. That decoupling from reality can last weeks, months, or years.

Let's try another extreme hypothetical: What if AMC got FOMOed up to become 95% of the stock market despite no changes in the underlying business. Do we all follow the Apes onto the moon rocket? Now you could say "it doesn't matter, when it comes back down to reality my holdings will just have done the round trip along with it". But how do you plan around that? If you estimate that your current 70% US TSM portfolio with AMC taking up 95% of that 70% supports whatever withdrawal rate you consider safe based on backtesting and/or Monte Carlo, do you go ahead and retire, or do you think "hmmmm, I can't really handle 66% of my portfolio going to money heaven overnight, so I need to either diversify away from cap-weight or I need to work longer to build a larger buffer and/or wait for the AMC situation to resolve itself"?
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Re: Is the S&P 500 still diversified?

Post by alluringreality »

20cm wrote: Sun Jun 04, 2023 5:34 pm do you think "hmmmm, I can't really handle 66% of my portfolio going to money heaven overnight
That's amusing, my first thought on the original scenario was, what is the largest historical public market bankruptcy? Apparently the answer is Lehman Brothers. I've only listened to Too Big To Fail for backstory and was curious what happened for bond holders.
viewtopic.php?p=3281566

The following seems a bit further discussion around Invesco's explanation for interpreting the 75-5-10 diversification rule.
viewtopic.php?t=176714
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Re: Is the S&P 500 still diversified?

Post by burritoLover »

Charles Joseph wrote: Sun Jun 04, 2023 12:20 pm
burritoLover wrote: Sun Jun 04, 2023 12:00 pm
Charles Joseph wrote: Sun Jun 04, 2023 10:24 am
burritoLover wrote: Sun Jun 04, 2023 7:42 am The US market has become a gambler's paradise. It's more investors trying to ride the wave of whatever the latest narrative is (currently AI), rather than any sane pricing of future earnings.
The "latest narrative" merely provides a descriptive account of a connected set of events which informs the market's efforts to discount the current value of future company cash flows. That's what the market does. It's what the market is: it's a discounting mechanism.
...The point is, if you invest in a market-cap weighted fund, things can get concentrated at the top. It isn't a thing to react to, it is something you have to live with by choosing a narrow basket of stocks (large caps) of a single country...
Things always are and always have been concentrated at the top. Studies show something like 4% of stocks account for 94% of market returns since the 1920s. The other 96% of stocks have earned the equivalent of T-Bills (these percentages are from memory but this is close!). That seems to be an essential characteristic of the market. Why would I want to miss out on those gains by doing something other than market-cap weighting?
I'm not suggesting ditching market-cap. I'm suggesting that if you invest in one country and the top get concentrated (top ten at 30% is on the extreme ends historically), then you should not be surprised and you'll have to live with any particular effects from that concentration. Not only is it high historically, it is also relatively concentrated in related industries. It doesn't matter if you are buy and hold and are not prone to panic.
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Re: Is the S&P 500 still diversified?

Post by Call_Me_Op »

If you want to know if the S&P 500 is diversified, you need to define what you mean by "diversified." It does do a reasonable job of capturing the performance of the US market as a whole, since it represents that vast majority of the value of US stocks. Is that what you mean by diversified, or something else?
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Re: Is the S&P 500 still diversified?

Post by seajay »

nisiprius wrote: Sun Jun 04, 2023 2:53 pm It. Is. Not. "Concentrated" into a small number of stocks.

Does anybody think that the following are examples of correct usage of the word "concentrated?"

1) A table has on it 24 twelve-ounce cans of beer, a total of 288 ounces, and a two kegs containing 1980 ounces of beer each. The kegs represent two containers out of 26, or just 7.7% of the containers. Yet they hold 3960/4248 = 83% of the beer. 7.7% of the containers hold 83% of the beer, so the beer is concentrated into just two containers.
.
.
Yep! If the two kegs were lost, so also was 83% of the beer. If two cans were lost then less than 1.5% of the beer was lost.

Seawater isn't highly concentrated water, its just water, diluted with some salt. The pharmaceutical definition of concentrated water is one that is 40X stronger than single-strength water.

Alaska the US largest state is still only 17% of the total land mass,
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Re: Is the S&P 500 still diversified?

Post by seajay »

20cm wrote: Sun Jun 04, 2023 5:34 pm
nisiprius wrote: Sun Jun 04, 2023 4:56 pm It's a little hard to figure out where the money to do that would come from.
The money doesn't come from anywhere. When NVDA's market cap went up by $200B+ last week, there wasn't $200B+ that came into the stock from somewhere. The market cap is set by the marginal buyer. If enough buyers are hysterical enough, they can drive the market cap of a company well past any valuation it realistically has any business being at. That decoupling from reality can last weeks, months, or years.
A Ponzi, where the current stock price (market cap) is defined according to the weight of buyers/sellers at the time.

On a fundamentals basis, each of 10 stocks might each have equal probability of being the next years best performing stock. Where the typical tendency is for the years best performer to offset and more the years worst performer. The worst might be down -25%, the best be up +33.3%, could even be the same two stocks that cycle through those motions but in complete opposite phases, both individually compounding to 0%.

Investors tend to shun gamblers, a gambler would be more inclined to avoid the Ponzi, go with the equal weighted, investors in contrast often prefer the Ponzi.
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Re: Is the S&P 500 still diversified?

Post by TheTimeLord »

https://www.investors.com/news/palo-alt ... June%2020.
Palo Alto Networks (PANW) will replace Dish Network (DISH) in the S&P 500 index, S&P Dow Jones Indices announced Friday night. PANW stock jumped to a record high early Monday.

Dish Network will replace Cutera (CUTR) in the S&P SmallCap 600.

PANW stock will join the S&P 500 before the market open on June 20. It's part of a quarterly rebalancing for the S&P indexes.
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Re: Is the S&P 500 still diversified?

Post by donaldfair71 »

Let's assume it's not.

On an American's domestic side, what are the alternatives?
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Re: Is the S&P 500 still diversified?

Post by muffins14 »

stocknoob4111 wrote: Sun Jun 04, 2023 11:18 am a lot of great info in this thread, thanks! It looks like the gist of it is that this isn't a historical anomaly but the way the index has behaved many times in the past. The article from MW is definitely alarming though and seems to imply that somehow the index has become out of wack now in a way that does not have any historical parallels.
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Re: Is the S&P 500 still diversified?

Post by muffins14 »

donaldfair71 wrote: Mon Jun 05, 2023 8:36 am Let's assume it's not.

On an American's domestic side, what are the alternatives?
Value tilt, small-cap value tilt
Last edited by muffins14 on Mon Jun 05, 2023 8:59 am, edited 1 time in total.
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Re: Is the S&P 500 still diversified?

Post by alluringreality »

donaldfair71 wrote: Mon Jun 05, 2023 8:36 am On an American's domestic side, what are the alternatives?
If someone is buying the S&P 500, then a portion of equal weight or reverse weight S&P 500 might be options for reducing the weight of the top of their holdings. Expenses for either are higher, and it tends to be period dependant if market or equal weight outperforms. Mixing a portion of midcap (or all like Mel's strategy) or small cap funds can also spread out assets with lower expenses, although historically only occasionally has this happened to pay off, such as the 2000 decline. Some people tilt to value. There are various other strategies that tend to move away from market weighting, and John Bogle's costs matter hypothesis might question if various strategies are comparatively worth the cost. From a practical standpoint, I tend to be limited by options in my 401k, since I think tax-advantaged accounts still make sense for our considerations. Non-market strategies tend to also have tax implications from any buying and selling, although possibly something like holding lots of stocks might be fairly tax efficient without needing to buy at market weight.
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Re: Is the S&P 500 still diversified?

Post by donaldfair71 »

muffins14 wrote: Mon Jun 05, 2023 8:59 am
donaldfair71 wrote: Mon Jun 05, 2023 8:36 am Let's assume it's not.

On an American's domestic side, what are the alternatives?
Value tilt, small-cap value tilt
This may or may not lead to outperformance, and it has its own merits to tilt. I tilt on both the domestic and foreign side. But it is not better diversified.
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Re: Is the S&P 500 still diversified?

Post by TheTimeLord »

Fun Facts
Article PUBLISHED WED, MAY 10 20238:49 AM EDT
https://www.cnbc.com/2023/05/10/apple-v ... kets-.html
Apple vs. the world

(market capitalization)

Apple: $2.7 trillion
UK : $2.6t (595 companies)
France: $1.8t (235 companies)
India: $1.4t (1,242 companies)
Germany: $1.3t (255 companies)
Source: Dimensional Funds, 2023 Matrix Book
Global market capitalization, by country

(in trillions, with % of global share)

U.S. $40 trillion (59%)
Japan $4.1t (6%)
United Kingdom $2.6t (4%)
China $2.5t (4%)
Canada $2.1t (3%)
France $1.8t (3%)
Switzerland $1.6t (2%)
India $1.4t (2%)
Australia $1.4t (2%)
Germany $1.3t (2%)
Source: Dimensional Funds, 2023 Matrix Book
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Re: Is the S&P 500 still diversified?

Post by donaldfair71 »

alluringreality wrote: Mon Jun 05, 2023 8:59 am
donaldfair71 wrote: Mon Jun 05, 2023 8:36 am On an American's domestic side, what are the alternatives?
If someone is buying the S&P 500, then a portion of equal weight or reverse weight S&P 500 might be options for reducing the weight of the top of their holdings. Expenses for either are higher, and it tends to be period dependant if market or equal weight outperforms. Mixing a portion of midcap (or all like Mel's strategy) or small cap funds can also spread out assets with lower expenses, although historically only occasionally has this happened to pay off, such as the 2000 decline. Some people tilt to value. There are various other strategies that tend to move away from market weighting, and John Bogle's costs matter hypothesis might question if various strategies are comparatively worth the cost. From a practical standpoint, I tend to be limited by options in my 401k, since I think tax-advantaged accounts still make sense for our considerations. Non-market strategies tend to also have tax implications from any buying and selling, although possibly something like holding lots of stocks might be fairly tax efficient without needing to buy at market weight.
Any move away from market weighting is lesser diversified. Which is okay, I do this myself in some of my portfolio. But the topic at hand is the diversification of the S&P500.
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Re: Is the S&P 500 still diversified?

Post by muffins14 »

donaldfair71 wrote: Mon Jun 05, 2023 9:14 am
muffins14 wrote: Mon Jun 05, 2023 8:59 am
donaldfair71 wrote: Mon Jun 05, 2023 8:36 am Let's assume it's not.

On an American's domestic side, what are the alternatives?
Value tilt, small-cap value tilt
This may or may not lead to outperformance, and it has its own merits to tilt. I tilt on both the domestic and foreign side. But it is not better diversified.
It is diversified across factors. Many people on the board insist that the number of ticker symbols is the only form of diversification though, rather than portfolio characteristics
Last edited by muffins14 on Mon Jun 05, 2023 9:25 am, edited 1 time in total.
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Re: Is the S&P 500 still diversified?

Post by donaldfair71 »

Anyone with absolute conviction that the SP500 is too top heavy can, at this very moment, use Direxion ETFs to short Apple, Microsoft, etc. Nvidia one is on the way (and exists in other ETF families).
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Re: Is the S&P 500 still diversified?

Post by donaldfair71 »

muffins14 wrote: Mon Jun 05, 2023 9:23 am
donaldfair71 wrote: Mon Jun 05, 2023 9:14 am
muffins14 wrote: Mon Jun 05, 2023 8:59 am
donaldfair71 wrote: Mon Jun 05, 2023 8:36 am Let's assume it's not.

On an American's domestic side, what are the alternatives?
Value tilt, small-cap value tilt
This may or may not lead to outperformance, and it has its own merits to tilt. I tilt on both the domestic and foreign side. But it is not better diversified.
It is diversified across factors
It is. I give anyone using it credit, at least they're shorting areas of the market they deem overpriced by conventional understandings of diversification and not just debating it abstractly.
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Re: Is the S&P 500 still diversified?

Post by alluringreality »

donaldfair71 wrote: Mon Jun 05, 2023 9:17 am Any move away from market weighting is lesser diversified. Which is okay, I do this myself in some of my portfolio. But the topic at hand is the diversification of the S&P500.
Doesn't the first sentence depend on the definition of diversified? The line of thought from 20cm upthread would essentially mean that market weight, and presumably also the S&P 500, would no longer continue to meet the 1940 definition for the “diversified” designation. The linked article from the first post largely just surrounds top of the market valuation opinion, and it does not even note how the 1940 requirement probably remains met. It's been a while since I've read the following for which talking points are included, but the subject line seems to take a different stance, and nisiprius does bring up the definition implications.
viewtopic.php?t=251043
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Re: Is the S&P 500 still diversified?

Post by nisiprius »

It's a sterile debate if we don't define "diversification" and exactly what specific benefits we expect to get from it, but for the record: since inception, RSP, the Invesco S&P 500 Equal Weight ETF, compared to an S&P 500 index fund, has had:

Source

Image
  • deeper dips both in 2008-2009 and in 2020
  • higher volatility as measured by standard deviation
  • a worse worst year
  • lower Sharpe and Sortino ratios, meaning it had higher return but the extra return wasn't worth the extra risk
To my thinking, this suggests the equal-weighted fund is (slightly) less diversified than the cap-weighted fund.

For a more sophisticated measure, consider two 60/40 portfolios, one with RSP and Total Bond (VBTLX), and the other with 500 Index (VFIAX) and Total Bond. One measure of "diversification" is the diversification ratio, which is the weighted average of component standard deviations divided by the portfolio standard deviation.

Since inception of RSP, Jan 2004 - May 2023, the numbers for standard deviations have been (all from PortfolioVisualizer)

VFIAX alone, 14.82%
RSP alone, 17.02%
Total Bond, 3.98%

Weighted average of 60% VFIAX, 40% VBTLX 10.48%
Weighted average of 60% RSP, 40% VBTLX: 11.80%

60/40 VFIAX/VBTLX portfolio 9.15%
60/40 RSP/VBTLX portfolio 10.32%

60/40 VFIAX/VBTLX diversification ratio = 10.48%/9.15% = 1.15
60/40 RSP/VBTLX diversification ratio = 11.80%/10.32% = 1.14

You can phrase this as you like:
  • Substituting RSP for VFIAX made virtually no difference
  • Substituting RSP for VFIAX didn't increase diversification
  • Substituting RSP for VFIAX reduced diversification.
People have been intrigued by RSP because if you look only at return, ignoring any measurement of either "risk" or "diversification," it looks like "a better kind of S&P 500 index fund." But I see no evidence for it being an improvement--it's just a way to take more risk, with is almost but not quite compensated by extra return.
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Re: Is the S&P 500 still diversified?

Post by donaldfair71 »

alluringreality wrote: Mon Jun 05, 2023 9:34 am
donaldfair71 wrote: Mon Jun 05, 2023 9:17 am Any move away from market weighting is lesser diversified. Which is okay, I do this myself in some of my portfolio. But the topic at hand is the diversification of the S&P500.
Doesn't the first sentence depend on the definition of diversified?
viewtopic.php?t=251043
Of course it does.

But let me rephrase:

Any move away from market weighting carries with it no better evidence for optimal diversification than what market weighting the total market provides.

Put another way, the SP500 may or may not be diversified. Going outside of market weighting could or could not improve returns going forward, but I have not seen evidence that it is better diversified. Again, I tilt to small/value globally. But it is not better diversified (may not be worse) than, say, the All-World index.
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Re: Is the S&P 500 still diversified?

Post by donaldfair71 »

nisiprius wrote: Mon Jun 05, 2023 10:10 am It's a sterile debate if we don't define "diversification" and exactly what specific benefits we expect to get from it, but for the record: since inception, RSP, the Invesco S&P 500 Equal Weight ETF, compared to an S&P 500 index fund, has had:

Source

Image
  • deeper dips both in 2008-2009 and in 2020
  • higher volatility as measured by standard deviation
  • a worse worst year
  • lower Sharpe and Sortino ratios, meaning it had higher return but the extra return wasn't worth the extra risk
To my thinking, this suggests the equal-weighted fund is (slightly) less diversified than the cap-weighted fund.

For a more sophisticated measure, consider two 60/40 portfolios, one with RSP and Total Bond (VBTLX), and the other with 500 Index (VFIAX) and Total Bond. One measure of "diversification" is the diversification ratio, which is the weighted average of component standard deviations divided by the portfolio standard deviation.

Since inception of RSP, Jan 2004 - May 2023, the numbers for standard deviations have been (all from PortfolioVisualizer)

VFIAX alone, 14.82%
RSP alone, 17.02%
Total Bond, 3.98%

Weighted average of 60% VFIAX, 40% VBTLX 10.48%
Weighted average of 60% RSP, 40% VBTLX: 11.80%

60/40 VFIAX/VBTLX portfolio 9.15%
60/40 RSP/VBTLX portfolio 10.32%

60/40 VFIAX/VBTLX diversification ratio = 10.48%/9.15% = 1.15
60/40 RSP/VBTLX diversification ratio = 11.80%/10.32% = 1.14

You can phrase this as you like:
  • Substituting RSP for VFIAX made virtually no difference
  • Substituting RSP for VFIAX didn't increase diversification
  • Substituting RSP for VFIAX reduced diversification.
People have been intrigued by RSP because if you look only at return, ignoring any measurement of either "risk" or "diversification," it looks like "a better kind of S&P 500 index fund." But I see no evidence for it being an improvement--it's just a way to take more risk, with is almost but not quite compensated by extra return.
To build on to this post, I think sometimes people forget that the SP500 (and even better, a fund like VTI) is simply riding the coattails of the aggregate active management. It is diversified wholly because it is reflecting at any point the viewpoints of millions of investors. They may or may not be rational at any given time, but you can't get away from the idea that it is the consensus among hundreds of millions of people (from Joe down the street to the biggest fund managers).
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Re: Is the S&P 500 still diversified?

Post by vv19 »

Yes, you are. Why would anyone think otherwise?

I am surprised this question comes in often on this board.
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Re: Is the S&P 500 still diversified?

Post by freyj6 »

It just occurred to me that since Apple is almost 40% of Berkshire's stock portfolio, the index is even more weighted towards big tech.

Personally I think that those who only hold VTI (total market) or VOO (SP500) will have a rude awakening in the next 5 years. Not to mention non-bogleheads who are heavily in QQQ or riskier specialty funds or call options.

It's been a bit of a letdown diversifying with international and value stocks these last few years, but I'm happy to be there now.

At some point price has to matter.
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Re: Is the S&P 500 still diversified?

Post by AdrianC »

nisiprius wrote: Mon Jun 05, 2023 10:10 am It's a sterile debate if we don't define "diversification" and exactly what specific benefits we expect to get from it, but for the record: since inception, RSP, the Invesco S&P 500 Equal Weight ETF, compared to an S&P 500 index fund, has had:

Source

Image
  • deeper dips both in 2008-2009 and in 2020
  • higher volatility as measured by standard deviation
  • a worse worst year
  • lower Sharpe and Sortino ratios, meaning it had higher return but the extra return wasn't worth the extra risk
To my thinking, this suggests the equal-weighted fund is (slightly) less diversified than the cap-weighted fund.
If you add Berkshire to your comparison, you will see that in the same time period, Berkshire has had:
  • smaller dip in 2008-2009
  • a better worst year
  • higher Sortino ratio
Berkshire is clearly riskier than either S&P500 fund, so I'm not convinced these are good measures of risk.

Intuitively, it seems that an equal weight fund should be less risky than a cap-weighted fund.
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Re: Is the S&P 500 still diversified?

Post by alluringreality »

AdrianC wrote: Tue Jun 06, 2023 8:36 am If you add Berkshire to your comparison, you will see that in the same time period, Berkshire has had:
  • smaller dip in 2008-2009
  • a better worst year
  • higher Sortino ratio
Berkshire is clearly riskier than either S&P500 fund, so I'm not convinced these are good measures of risk.

Intuitively, it seems that an equal weight fund should be less risky than a cap-weighted fund.
I agree, Berkshire Hathaway is a single legal entity. It's fairly reasonable to suggest one stock has more specific or unsystematic risk than the public market. I can understand why an opinion piece might choose to label that idea as less diversified, and to say that Berkshire Hathaway exhibits diversifiable risk.

Generally the market portfolio amounts to systematic risk, and various sources suggest systematic risk cannot be mitigated through diversification. If someone chooses to define diversification as attempting to limit unsystematic risk, I'm thinking the market portfolio does not necessarily address that intent. The part of the discussion I primarily find baffling is that recommending the market portfolio probably does not address what the author linked by the original post most likely intends to accomplish. Clearly his suggestions of equal weight or midcap would be generally expected to exhibit greater historical volatility over long time periods, but I'm rather lost about what recommending the market portfolio achieves in relation to the concern of the article, and what the author apparently intends to try avoiding by not investing in the market portfolio. I suppose recommending the market is intended to suggest the author is simply misguided, yet it also does not appear to address the author's likely intent concerning unsystematic risk.
Last edited by alluringreality on Tue Jun 06, 2023 2:02 pm, edited 1 time in total.
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Re: Is the S&P 500 still diversified?

Post by 20cm »

AdrianC wrote: Tue Jun 06, 2023 8:36 am
nisiprius wrote: Mon Jun 05, 2023 10:10 am It's a sterile debate if we don't define "diversification" and exactly what specific benefits we expect to get from it, but for the record: since inception, RSP, the Invesco S&P 500 Equal Weight ETF, compared to an S&P 500 index fund, has had:

Source

Image
  • deeper dips both in 2008-2009 and in 2020
  • higher volatility as measured by standard deviation
  • a worse worst year
  • lower Sharpe and Sortino ratios, meaning it had higher return but the extra return wasn't worth the extra risk
To my thinking, this suggests the equal-weighted fund is (slightly) less diversified than the cap-weighted fund.
If you add Berkshire to your comparison, you will see that in the same time period, Berkshire has had:
  • smaller dip in 2008-2009
  • a better worst year
  • higher Sortino ratio
Berkshire is clearly riskier than either S&P500 fund, so I'm not convinced these are good measures of risk.

Intuitively, it seems that an equal weight fund should be less risky than a cap-weighted fund.
nisiprius' analysis that you replied to is suspect as it chooses, perhaps unintentionally, a period that saw a doubling of the concentration of market cap at the top of the index that this thread was originally about. It's worth noting that this was a period of better than average absolute performance for cap weight S&P 500 relative to equal weight, due no doubt in part to benefiting from following that increase in concentration, yet cap-weight still underperformed.

However it's not intuitive to me that equal weight should be less risky than cap weight. Equal weight is effectively a heavily smaller-cap tilted variant of the original index. Knowing just that, we'd expect over the longer term to see equal weight have more volatility and better returns, which is the case. One interesting question would be is there a level of concentration of cap weight where the single company risk (for example finding out that Apple was actually Enron 2.0) that doesn't show up in historical volatility statistics comes into play?
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