SP500 is very top heavy right now

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hdas
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SP500 is very top heavy right now

Post by hdas » Thu Nov 14, 2019 12:11 pm

Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:

Image
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

aristotelian
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Re: SP500 is very top heavy right now

Post by aristotelian » Thu Nov 14, 2019 12:19 pm

That looks bad until you realize it starts at 10% instead of 0. Still worth noting. Apple's growth this year has been insane. At the same time, Small Caps had a terrible year. Are small caps undervalued or megacaps overvalued?

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Re: SP500 is very top heavy right now

Post by mrspock » Thu Nov 14, 2019 12:26 pm

Last I checked, all of them make money — a lot of money. What were the top 5 companies’ names for 1999? I think this context matters when assessing the validity of the comparison.

Today they are:
Microsoft
Apple
Amazon
Facebook
Berkshire

Seems to be they are all pretty legit, large moats, revenue not hinging on a bubble, tons of cash etc. It’s indexing surfacing the best of the best like it is supposed to.

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Re: SP500 is very top heavy right now

Post by Scooter57 » Thu Nov 14, 2019 12:57 pm

Here's an interesting article that breaks down how dominated the Vanguard Total Stock Market Index Fund (VTSAX and VTI) is by a very small number of stocks and how most of the thousands of other stocks that make up the index make up such tiny percentage of its total holdings as to make no difference in the fund's performance.

https://seekingalpha.com/article/430657 ... isled-hype

This explains to me why there is such a close correspondence to the performance of Dow Jones Industrials Index (30 stocks), the S&P 500 (500 stocks), and the Total Stock Market Index Fund with 3000+ stocks.

The S&P seems to have done a bit better in the recent years, but they cherry pick their stocks.

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Re: SP500 is very top heavy right now

Post by AHTFY » Thu Nov 14, 2019 1:04 pm

VTWAX (Vanguard Total World Stock Index Fund) has 10.8% in the top ten names. https://investor.vanguard.com/mutual-fu ... d-holdings

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Kenkat
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Re: SP500 is very top heavy right now

Post by Kenkat » Thu Nov 14, 2019 1:35 pm

This is a pretty cool site that lets you see holdings of the S&P 500 by year:

https://etfdb.com/history-of-the-s-and-p-500/#1999

Top 5 in 1999:
Microsoft
GE
Cisco
Wal-Mart
Exxon Mobil

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willthrill81
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Re: SP500 is very top heavy right now

Post by willthrill81 » Thu Nov 14, 2019 1:49 pm

That's the potential blessing and curse of market cap-weighting: you often get a seemingly top-heavy allocation. FWIW, in the year 2000, the top ten companies in the S&P 500 composed about 25%, IIRC, of the total market cap, and every one of those firms went on to underperform, usually dramatically, the index over the next 18 years. So those mega caps had a rough run for a long time, and other mega caps have done well for the last decade or so. No one knows what the future, which is what really matters, holds in store.

Many say that it's impossible to do better than a TSM approach. For a long-term buy-and-hold strategy, I personally believe that equal weighting a large-cap and a small-cap index fund may better diversify the driver's of one's equity returns (e.g. tilts toward small-caps). The costs of such a strategy are basically identical these days to something like VTSAX, and historically there hasn't been much long-term downside vs. a purely market cap-weighted approach in terms of either added volatility or significant underperformance of TSM.
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Taylor Larimore
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Re: SP500 is very top heavy right now--thankfully

Post by Taylor Larimore » Thu Nov 14, 2019 1:54 pm

SP500 is very top heavy right now.
hdas:

Most S&P 500 Index Fund investors are very happy that they own the market weight in the biggest and most successful companies in the U.S..

Best wishes.
Taylor
Jack Bogle's Words of Wisdom (2010): "When we incorporate the results of the Vanguard 500 Index Fund since 1998 with its previous record over 15 years, we find that the fund outpaced about 68 percent of all general equity funds on a pretax basis but near 90 percent on an after-tax basis."
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Re: SP500 is very top heavy right now

Post by oldcomputerguy » Thu Nov 14, 2019 1:55 pm

Kenkat wrote:
Thu Nov 14, 2019 1:35 pm
This is a pretty cool site that lets you see holdings of the S&P 500 by year:

https://etfdb.com/history-of-the-s-and-p-500/#1999

Top 5 in 1999:
Microsoft
GE
Cisco
Wal-Mart
Exxon Mobil
I find it interesting to note that two of these were likely due to the "tech bubble" of the late 90's. In addition, Microsoft was at the time riding high on the back of Windows 95/98/NT and was about to release Windows 2000 (which to my jaded eye was the pinnacle of their product line, but hey, I'm oldcomputerguy, right?).
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Re: SP500 is very top heavy right now

Post by dmcmahon » Thu Nov 14, 2019 1:58 pm

Kenkat wrote:
Thu Nov 14, 2019 1:35 pm
This is a pretty cool site that lets you see holdings of the S&P 500 by year:

https://etfdb.com/history-of-the-s-and-p-500/#1999

Top 5 in 1999:
Microsoft
GE
Cisco
Wal-Mart
Exxon Mobil
And by owning the index you automatically rebalanced from these to the new list without taxable side effects.

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Re: SP500 is very top heavy right now

Post by permport » Thu Nov 14, 2019 2:04 pm

The market cap pundits will wave this issue away, but it's a perfectly legitimate concern. Swedroe has remarked on this several times.

Adding discrete segments of the market to your portfolio via international, small/mid caps, and value stocks, etc. can improve diversification tremendously.
Buy right and hold tight.

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hdas
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Re: SP500 is very top heavy right now

Post by hdas » Thu Nov 14, 2019 2:08 pm

Here's the breakdown for QQQ:

MSFT Microsoft Corp 11.21%
AAPL Apple Inc 9.95%
CSCO Cisco Systems Inc 2.84%
INTC Intel Corp 2.60%
ADBE Adobe Systems Inc 1.74%

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: SP500 is very top heavy right now

Post by inbox788 » Thu Nov 14, 2019 2:14 pm

mrspock wrote:
Thu Nov 14, 2019 12:26 pm
What were the top 5 companies’ names for 1999? I think this context matters when assessing the validity of the comparison.

Today they are:
Microsoft
Apple
Amazon
Facebook
Berkshire
[Google is actually 3rd or 4th -- might need to add up 2 classes of stock; same with Berkshire to a lesser degree] https://www.slickcharts.com/sp500

I wanted to know too. I found this comparison and hope it's accurate: https://www.visualcapitalist.com/a-visu ... 999-today/
Microsoft
GE
Cisco
Exxon
Walmart

[Lucent and Nokia were also in the top 10]

It took 20 years for Microsoft to double from $500B to $1000B, but that's better than if you invested in GE, LU, NOK. Walmart did comparatively $200B to $350B. For reference, SP500 was about 1500 vs 3000, so similar to MSFT and WMT. BRK.A went from below 75k to over $300k today, but that doesn't take into account the dividends. [From Morningstar comparison: 11/30/1999 to 11/13/2019 BRK.A +272,102.00 | +474.87% SPX +1,704.97 | +122.74% × MSFT +101.79 | +223.59% -- I'm not sure total return including dividends is being reported for WMT and MSFT like the old charts; SP500 adjusts for dividends and Berkshire has no dividends.]

I think those companies at the time looked as invincible as the top companies today. I would bet that more than one of the top 5 will remain in the group 20 years from now, but that's not what history says. It would be very hard to predict which ones, if any, remain in the top 5 after 20 more years, but it would be even harder to predict what new companies enter the top 5 (Tesla anyone? Skynet?).

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Re: SP500 is very top heavy right now

Post by rkhusky » Thu Nov 14, 2019 3:26 pm

I prefer to look at the products under each ticker, rather than just the company name. Anything other than market weight runs into the merger/spin-off paradox.

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Re: SP500 is very top heavy right now

Post by mrspock » Thu Nov 14, 2019 3:35 pm

The concentration at 17% doesn’t bother me at all either. This seems like a more than reasonable amount of an AA to allot to these companies 1.5-3.5% of total. Also, there’s no way I could do better stock picking (or meddling around with tilting) than what my portfolio has done indexing to the total market (VTI). So while interesting to look at, this doesn’t really sway me to change anything, quite the opposite — in 1999 those top 5 looked like keepers.”, I would have been wrong on four of them :) .

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Carlos Danger
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Re: SP500 is very top heavy right now

Post by Carlos Danger » Thu Nov 14, 2019 3:54 pm

It would bother me if an S&P 500 Index fund was the only thing we invested in. It's not, so MSFT is only 1.3% of our portfolio instead of 4.3% like SPY.

The top 10 equity holdings in our portfolio make up 8.16% of the total portfolio.

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Re: SP500 is very top heavy right now

Post by illumination » Thu Nov 14, 2019 4:16 pm

Kenkat wrote:
Thu Nov 14, 2019 1:35 pm
This is a pretty cool site that lets you see holdings of the S&P 500 by year:

https://etfdb.com/history-of-the-s-and-p-500/#1999

Top 5 in 1999:
Microsoft
GE
Cisco
Wal-Mart
Exxon Mobil
That's a cool link, thanks

So crazy some of the companies that once occupied the Top Ten in certain years.

I had never even heard of Atlantic Richfield for instance.

Makes me glad I'm (mostly) an index investor and I don't have to predict the future.

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greg24
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Re: SP500 is very top heavy right now

Post by greg24 » Thu Nov 14, 2019 4:24 pm

"right now"?

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Taylor Larimore
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Adding to the market portfolio?

Post by Taylor Larimore » Thu Nov 14, 2019 5:54 pm

permport wrote:
Thu Nov 14, 2019 2:04 pm
The market cap pundits will wave this issue away, but it's a perfectly legitimate concern. Swedroe has remarked on this several times.

Adding discrete segments of the market to your portfolio via international, small/mid caps, and value stocks, etc. can improve diversification tremendously.
permport:

Adding discrete segments of the market portfolio can also hurt your returns tremendously:

http://news.morningstar.com/index/indexReturn.html

Best wishes.
Taylor
Jack Bogle's Words of Wisdom:“This business is all about simplicity and low cost. I’m not into all these market strategies and theories and cost-benefit analyses — all the bureaucracy that goes with business. In investing, strip all the baloney out of it.”
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: SP500 is very top heavy right now

Post by AHTFY » Thu Nov 14, 2019 6:11 pm

illumination wrote:
Thu Nov 14, 2019 4:16 pm

That's a cool link, thanks

So crazy some of the companies that once occupied the Top Ten in certain years.

I had never even heard of Atlantic Richfield for instance.

Makes me glad I'm (mostly) an index investor and I don't have to predict the future.
Atlantic Richfield is ARCO, the gas company, now part of Marathon Petroleum ($96B in revenue). We still have ARCO gas stations here.

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Re: SP500 is very top heavy right now

Post by Scooter57 » Thu Nov 14, 2019 6:13 pm

But aren't we always hearing here that true diversification WILL lead to lower returns?

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F150HD
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Re: SP500 is very top heavy right now

Post by F150HD » Thu Nov 14, 2019 6:20 pm

hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
I'd say you fell into a trap of misleading statistics.
-
Image
Last edited by F150HD on Thu Nov 14, 2019 6:23 pm, edited 2 times in total.

illumination
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Re: SP500 is very top heavy right now

Post by illumination » Thu Nov 14, 2019 6:22 pm

AHTFY wrote:
Thu Nov 14, 2019 6:11 pm
illumination wrote:
Thu Nov 14, 2019 4:16 pm

That's a cool link, thanks

So crazy some of the companies that once occupied the Top Ten in certain years.

I had never even heard of Atlantic Richfield for instance.

Makes me glad I'm (mostly) an index investor and I don't have to predict the future.
Atlantic Richfield is ARCO, the gas company, now part of Marathon Petroleum ($96B in revenue). We still have ARCO gas stations here.
But they obviously aren't in the top 10 anymore. Not even in the top 100.

Just shows how much things can change.

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Re: SP500 is very top heavy right now

Post by AHTFY » Thu Nov 14, 2019 6:34 pm

illumination wrote:
Thu Nov 14, 2019 6:22 pm
But they obviously aren't in the top 10 anymore. Not even in the top 100.
That is true, but I was only responding to your comment that you never even heard of them. I would bet that if you bought ARCO back when it was a top-ten stock, you would have done quite well. Certainly you would have underformed since it's no longer top ten, but you probably would have made good money. (Marathon Petroleum is up more than threefold over the last 8 years.)

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Re: SP500 is very top heavy right now

Post by hdas » Thu Nov 14, 2019 6:37 pm

F150HD wrote:
Thu Nov 14, 2019 6:20 pm
hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
I'd say you fell into a trap of misleading statistics.
-
Image
No, the main takeaway from the chart is that the concentration of the top 5 is at the 1999 bubble level. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Adding to the market portfolio?

Post by permport » Thu Nov 14, 2019 6:37 pm

Taylor Larimore wrote:
Thu Nov 14, 2019 5:54 pm
permport wrote:
Thu Nov 14, 2019 2:04 pm
The market cap pundits will wave this issue away, but it's a perfectly legitimate concern. Swedroe has remarked on this several times.

Adding discrete segments of the market to your portfolio via international, small/mid caps, and value stocks, etc. can improve diversification tremendously.
permport:

Adding discrete segments of the market portfolio can also hurt your returns tremendously:

http://news.morningstar.com/index/indexReturn.html

Best wishes.
Taylor
Jack Bogle's Words of Wisdom:“This business is all about simplicity and low cost. I’m not into all these market strategies and theories and cost-benefit analyses — all the bureaucracy that goes with business. In investing, strip all the baloney out of it.”
I understand your contention.

But if the situation were reversed I'm sure you'd hit me with the ol' "Past performance doesn't guarantee future results. You will always find some segment of the market that outperforms for a while." In addition to, "Do you really want to buy into a fund AFTER it has outperformed?"

Those are the same arguments I could peg against anyone who only holds market weight, or overweights/only holds U.S. -- including yourself.

The whole thing becomes circular because people just use the argument that suits their already formed view. However, as far as I'm concerned, I'd always rather have more diversification than less, so I will stick with implementing factor diversification and full international. Even though, yes, that necessarily will mean that I will underperform when someone else's singular bet does particularly well. That's the nature of diversification.
Buy right and hold tight.

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Re: SP500 is very top heavy right now

Post by willthrill81 » Thu Nov 14, 2019 6:38 pm

F150HD wrote:
Thu Nov 14, 2019 6:20 pm
hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
I'd say you fell into a trap of misleading statistics.
-
Image
That's more a case of a misleading graph.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: SP500 is very top heavy right now

Post by whodidntante » Thu Nov 14, 2019 6:39 pm

aristotelian wrote:
Thu Nov 14, 2019 12:19 pm
That looks bad until you realize it starts at 10% instead of 0. Still worth noting. Apple's growth this year has been insane. At the same time, Small Caps had a terrible year. Are small caps undervalued or megacaps overvalued?
Maybe they are both overvalued. What is the correct value? :happy

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Re: SP500 is very top heavy right now

Post by F150HD » Thu Nov 14, 2019 7:03 pm

:confused

Image

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siamond
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Re: SP500 is very top heavy right now

Post by siamond » Thu Nov 14, 2019 7:29 pm

Kenkat wrote:
Thu Nov 14, 2019 1:35 pm
This is a pretty cool site that lets you see holdings of the S&P 500 by year:

https://etfdb.com/history-of-the-s-and-p-500/#1999
Thank you for sharing, cool indeed. I'd be really glad to find a way to query the full holdings list for a given fund for a given year. I know Morningstar keeps such historical information. I don't know how to get it by public means.

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Re: SP500 is very top heavy right now

Post by donaldfair71 » Thu Nov 14, 2019 7:34 pm

dmcmahon wrote:
Thu Nov 14, 2019 1:58 pm
Kenkat wrote:
Thu Nov 14, 2019 1:35 pm
This is a pretty cool site that lets you see holdings of the S&P 500 by year:

https://etfdb.com/history-of-the-s-and-p-500/#1999

Top 5 in 1999:
Microsoft
GE
Cisco
Wal-Mart
Exxon Mobil
And by owning the index you automatically rebalanced from these to the new list without taxable side effects.
This gets lost too often in strategy discussion. The tax efficiency of a buy and hold total market index fund (especially ETFs but with accompanying index mutual funds at Vanguard as well) is a really big deal. Costs matter, all of them, not just ERs and commissions.

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Re: SP500 is very top heavy right now

Post by Taylor Larimore » Thu Nov 14, 2019 7:37 pm

permport:

In my opinion, adding more funds that are already in a Total Stock Market Index Fund does not add diversification. It actually reduces diversification. For example, if we add 50% more Small-Cap Value stocks to a Total Market Fund which already holds the market weight in Small-Cap Value stocks, it becomes obvious that we have not increased diversification because half the Total Market Fund would be about 3% of the market's value.

I live on the 35 Floor of a condominium on the edge of downtown Miami. When I go on our balcony, I see hundred's, probably thousands, of big and small corporations -- all trying to increase in value. A simple Total Market Index Fund holds stock in nearly all of them. It helps me sleep well.

Thank you, Mr. Bogle.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "My preferred index fund happens to be the total stock market which includes large, medium, and small stocks." -- "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: SP500 is very top heavy right now

Post by Ocean77 » Thu Nov 14, 2019 7:39 pm

I'm sure the top 5 companies have always looked good and solid at the time, no matter in which year it was. This year's top 5 companies also look very solid today. Who could imagine any of these getting into trouble, let alone going away? But if we take away the glamorous names and look under the hood, what type of businesses do we have?

- Two companies (Facebook, Google) that rely on advertising for almost all their revenue, just like newspapers once did. I'm sure in the heyday of newspapers, nobody expected that revenue stream to go to some new media, either.
- One low margin retailer (Amazon)
- Two tech companies (Apple, Microsoft) that look invincible, just like Nokia, IBM and Cisco once did

Let's see what the top companies will be in 10, 20 years. I'd be surprised if many of today's stars will still be in there.

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Re: SP500 is very top heavy right now

Post by Stinky » Thu Nov 14, 2019 7:40 pm

AHTFY wrote:
Thu Nov 14, 2019 1:04 pm
VTWAX (Vanguard Total World Stock Index Fund) has 10.8% in the top ten names. https://investor.vanguard.com/mutual-fu ... d-holdings
Interesting that 9 of top 10 names in the Total World fund are based in the US.

Only Nestle is non-US incorporated. But they do a lot of business in the US.
It's a GREAT day to be alive - Travis Tritt

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Re: SP500 is very top heavy right now

Post by donaldfair71 » Thu Nov 14, 2019 7:42 pm

mrspock wrote:
Thu Nov 14, 2019 3:35 pm
The concentration at 17% doesn’t bother me at all either. This seems like a more than reasonable amount of an AA to allot to these companies 1.5-3.5% of total. Also, there’s no way I could do better stock picking (or meddling around with tilting) than what my portfolio has done indexing to the total market (VTI). So while interesting to look at, this doesn’t really sway me to change anything, quite the opposite — in 1999 those top 5 looked like keepers.”, I would have been wrong on four of them :) .
I feel like using market-weighted total market fund isn’t the best I can do. But with a job, 3 kids, a few side hustles, two teachers salaries in the house, and the S&P500 as the only stock index fund in my (and my wife’s) 403b... It’s probably the best I can do. Better than most in fact (if I never sell or change mid-stream like I have in the past with other strategies).

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Re: SP500 is very top heavy right now

Post by permport » Thu Nov 14, 2019 7:47 pm

Taylor Larimore wrote:
Thu Nov 14, 2019 7:37 pm
permport:

In my opinion, adding more funds that are already in a Total Stock Market Index Fund does not add diversification. It actually reduces diversification. For example, if we add 50% more Small-Cap Value stocks to a Total Market Fund which already holds the market weight in Small-Cap Value stocks, it becomes obvious that we have not increased diversification because half the Total Market Fund would be about 3% of the market's value.

I live on the 35 Floor of a condominium on the edge of downtown Miami. When I go on our balcony, I see hundred's, probably thousands, of big and small corporations -- all trying to increase in value. A simple Total Market Index Fund holds stock in nearly all of them. It helps me sleep well.

Thank you, Mr. Bogle.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "My preferred index fund happens to be the total stock market which includes large, medium, and small stocks." -- "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
I respect your perspective. I think the Journal of Finance literature is pretty clear: the Fama-French Three Factor Model explains over 90% of the cross section of stock market returns. Exposure to these additional factors has benefit over and above a total market fund.

We will have to amicably agree to disagree.
Buy right and hold tight.

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Re: SP500 is very top heavy right now

Post by rkhusky » Thu Nov 14, 2019 8:05 pm

permport wrote:
Thu Nov 14, 2019 7:47 pm
I think the Journal of Finance literature is pretty clear: the Fama-French Three Factor Model explains over 90% of the cross section of stock market returns. Exposure to these additional factors has benefit over and above a total market fund.
The Fama-French Three Factor Model does not say anything about whether the factors have any benefit. It's a common misconception.

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Re: SP500 is very top heavy right now

Post by nedsaid » Thu Nov 14, 2019 8:12 pm

hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:

Image
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
Thank you. I have been warning of this and the 3 fund people think I am a nut. Notice also that the graph shows eerie similarities to 1999, we all know what happened in 2000, the Tech and Internet crash. The difference is that valuations aren't crazy like they were in 1999 and early 2000 and we are not seeing signs of a market blow-off. Perhaps a "Swedroe Shuffle" of part of your Total Market holdings into Value indexes might be a good idea.
A fool and his money are good for business.

columbia
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Re: SP500 is very top heavy right now

Post by columbia » Thu Nov 14, 2019 8:13 pm

If this information were actionable (is it?), it would seem to point to reducing equity exposure - as the implication is that a crash is coming; pulling your money from large caps and placing it it into small caps and/or international won’t save you from a crash.

MotoTrojan
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Re: SP500 is very top heavy right now

Post by MotoTrojan » Thu Nov 14, 2019 8:15 pm

nedsaid wrote:
Thu Nov 14, 2019 8:12 pm
hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:

Image
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
Thank you. I have been warning of this and the 3 fund people think I am a nut. Notice also that the graph shows eerie similarities to 1999, we all know what happened in 2000, the Tech and Internet crash. The difference is that valuations aren't crazy like they were in 1999 and early 2000 and we are not seeing signs of a market blow-off. Perhaps a "Swedroe Shuffle" of part of your Total Market holdings into Value indexes might be a good idea.
Swedroe shuffle sounds like market timing to me, and I already struggle enough with avoiding tinkering. I’d rather just hold the broad index but tilt small-value, as I do. Best of both worlds.

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Kenkat
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Location: Cincinnati, OH

Re: SP500 is very top heavy right now

Post by Kenkat » Thu Nov 14, 2019 8:19 pm

columbia wrote:
Thu Nov 14, 2019 8:13 pm
...placing it it into small caps and/or international won’t save you from a crash.
It kinda did save you in the 2000 crash, though. 2008? Nope.

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nedsaid
Posts: 12800
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Re: SP500 is very top heavy right now

Post by nedsaid » Thu Nov 14, 2019 8:23 pm

MotoTrojan wrote:
Thu Nov 14, 2019 8:15 pm
nedsaid wrote:
Thu Nov 14, 2019 8:12 pm
hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:

Image
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
Thank you. I have been warning of this and the 3 fund people think I am a nut. Notice also that the graph shows eerie similarities to 1999, we all know what happened in 2000, the Tech and Internet crash. The difference is that valuations aren't crazy like they were in 1999 and early 2000 and we are not seeing signs of a market blow-off. Perhaps a "Swedroe Shuffle" of part of your Total Market holdings into Value indexes might be a good idea.
Swedroe shuffle sounds like market timing to me, and I already struggle enough with avoiding tinkering. I’d rather just hold the broad index but tilt small-value, as I do. Best of both worlds.
Yes, it is a mild form of market timing. Really what you are doing is selling something with a lower future expected return and replacing it with something that has a higher future expected return. You could also think of it as Growth to Value rebalancing. You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher. If you sell a portion of your Total Stock Market Index and buy Small Cap Market Index, you might get some 3 funders that will peer over their glasses at you but it won't get you banned from Bogleheads.
A fool and his money are good for business.

rkhusky
Posts: 7607
Joined: Thu Aug 18, 2011 8:09 pm

Re: SP500 is very top heavy right now

Post by rkhusky » Thu Nov 14, 2019 8:30 pm

nedsaid wrote:
Thu Nov 14, 2019 8:23 pm
You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher.
So, Warren Buffett buying up companies, and making Berkshire Hathaway larger, creates more risk for the Total Stock Market? Total Stock Market is riskier with those companies under the Berkshire Hathaway umbrella than when the companies were operating on their own?

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permport
Posts: 178
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Re: SP500 is very top heavy right now

Post by permport » Thu Nov 14, 2019 8:32 pm

rkhusky wrote:
Thu Nov 14, 2019 8:05 pm
permport wrote:
Thu Nov 14, 2019 7:47 pm
I think the Journal of Finance literature is pretty clear: the Fama-French Three Factor Model explains over 90% of the cross section of stock market returns. Exposure to these additional factors has benefit over and above a total market fund.
The Fama-French Three Factor Model does not say anything about whether the factors have any benefit. It's a common misconception.
Oh good grief.
Buy right and hold tight.

rkhusky
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Re: SP500 is very top heavy right now

Post by rkhusky » Thu Nov 14, 2019 8:36 pm

permport wrote:
Thu Nov 14, 2019 8:32 pm
rkhusky wrote:
Thu Nov 14, 2019 8:05 pm
permport wrote:
Thu Nov 14, 2019 7:47 pm
I think the Journal of Finance literature is pretty clear: the Fama-French Three Factor Model explains over 90% of the cross section of stock market returns. Exposure to these additional factors has benefit over and above a total market fund.
The Fama-French Three Factor Model does not say anything about whether the factors have any benefit. It's a common misconception.
Oh good grief.
Exactly. The FF model works equally well whether value outperforms growth or vice versa. The FF model works equally well whether small outperforms big or vice versa. It is ambivalent to the performance of the factors.

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nedsaid
Posts: 12800
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Re: SP500 is very top heavy right now

Post by nedsaid » Thu Nov 14, 2019 8:39 pm

rkhusky wrote:
Thu Nov 14, 2019 8:30 pm
nedsaid wrote:
Thu Nov 14, 2019 8:23 pm
You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher.
So, Warren Buffett buying up companies, and making Berkshire Hathaway larger, creates more risk for the Total Stock Market? Total Stock Market is riskier with those companies under the Berkshire Hathaway umbrella than when the companies were operating on their own?
The Berkshire Hathaway phenomenon pales in comparison to the effect of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) on the index. What I am commenting on is the effect of High Tech/Internet on the index, Berkshire/Hathaway last I checked was not a Tech Stock. Indeed, I still see B/H in the Value Indexes, so B/H is not suffering from valuation or sentiment extremes. But yes, I would say that when you see concentration like we are seeing now in the indexes, risk is increased. The index is always somewhat top-heavy, the graph shows that it is more top-heavy than normal. The Warren Buffett effect here, while it exists, is relatively mild.
A fool and his money are good for business.

MotoTrojan
Posts: 6929
Joined: Wed Feb 01, 2017 8:39 pm

Re: SP500 is very top heavy right now

Post by MotoTrojan » Thu Nov 14, 2019 8:42 pm

nedsaid wrote:
Thu Nov 14, 2019 8:23 pm
MotoTrojan wrote:
Thu Nov 14, 2019 8:15 pm
nedsaid wrote:
Thu Nov 14, 2019 8:12 pm
hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:

Image
The outperformance - and increasing importance of a select few mega-cap U.S. equities is visible in
the increasing concentration of the S&P 500 into its top five companies. Few factor indices match the current 16.3% weight of the top five benchmark positions.
Let us see how it unfolds this time.

Cheers :greedy
Thank you. I have been warning of this and the 3 fund people think I am a nut. Notice also that the graph shows eerie similarities to 1999, we all know what happened in 2000, the Tech and Internet crash. The difference is that valuations aren't crazy like they were in 1999 and early 2000 and we are not seeing signs of a market blow-off. Perhaps a "Swedroe Shuffle" of part of your Total Market holdings into Value indexes might be a good idea.
Swedroe shuffle sounds like market timing to me, and I already struggle enough with avoiding tinkering. I’d rather just hold the broad index but tilt small-value, as I do. Best of both worlds.
Yes, it is a mild form of market timing. Really what you are doing is selling something with a lower future expected return and replacing it with something that has a higher future expected return. You could also think of it as Growth to Value rebalancing. You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher. If you sell a portion of your Total Stock Market Index and buy Small Cap Market Index, you might get some 3 funders that will peer over their glasses at you but it won't get you banned from Bogleheads.
Are you also moving your overall domestic allocation to International? Seems the same logic would suggest that is prudent.

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JoMoney
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Re: SP500 is very top heavy right now

Post by JoMoney » Thu Nov 14, 2019 8:48 pm

If you look at the top 10 it's relatively light compared to history.
John Bogle in The Policy Portfolio in an Era of Subdued Returns, June 2003 wrote: http://johncbogle.com/speeches/JCB_IASC0603.pdf
Image
... It’s easy to argue, of course that having, as the S&P 500 Index currently does, 24% of assets in its
10 largest stocks is inadequate diversification. But the reality is that that level of concentration is in fact
also below historic norms. In 1950, for example, the largest ten stocks composed fully 51%(!) of the total
value of the Index, and even in 1964 the top ten composed 38%. Is such diversification adequate?
There’s no way to be certain. But if the actual goal of investing is to capture as close as possible to 100%
of the return of the stock market, one simply tries to own the market itself, warts and all, with each
company weighted by its own market capitalization.
...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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nedsaid
Posts: 12800
Joined: Fri Nov 23, 2012 12:33 pm

Re: SP500 is very top heavy right now

Post by nedsaid » Thu Nov 14, 2019 8:51 pm

MotoTrojan wrote:
Thu Nov 14, 2019 8:42 pm
nedsaid wrote:
Thu Nov 14, 2019 8:23 pm
MotoTrojan wrote:
Thu Nov 14, 2019 8:15 pm
nedsaid wrote:
Thu Nov 14, 2019 8:12 pm
hdas wrote:
Thu Nov 14, 2019 12:11 pm
Nice SP report on their indices. What caught my attention was this chart, be safe out there :twisted:

Image



Let us see how it unfolds this time.

Cheers :greedy
Thank you. I have been warning of this and the 3 fund people think I am a nut. Notice also that the graph shows eerie similarities to 1999, we all know what happened in 2000, the Tech and Internet crash. The difference is that valuations aren't crazy like they were in 1999 and early 2000 and we are not seeing signs of a market blow-off. Perhaps a "Swedroe Shuffle" of part of your Total Market holdings into Value indexes might be a good idea.
Swedroe shuffle sounds like market timing to me, and I already struggle enough with avoiding tinkering. I’d rather just hold the broad index but tilt small-value, as I do. Best of both worlds.
Yes, it is a mild form of market timing. Really what you are doing is selling something with a lower future expected return and replacing it with something that has a higher future expected return. You could also think of it as Growth to Value rebalancing. You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher. If you sell a portion of your Total Stock Market Index and buy Small Cap Market Index, you might get some 3 funders that will peer over their glasses at you but it won't get you banned from Bogleheads.
Are you also moving your overall domestic allocation to International? Seems the same logic would suggest that is prudent.
Yes, I actually would advocate a move of a portion of one's US Stocks to International. But you have to look at this in the larger context of your life situation. I would never abandon the US Total Stock Market Index, just saying taking a portion of that to Small/Value and another portion to International might be prudent here. US Stock Market has higher valuations than International for some very good reasons yet seeing cheaper stocks outside of US gets my attention.
A fool and his money are good for business.

rkhusky
Posts: 7607
Joined: Thu Aug 18, 2011 8:09 pm

Re: SP500 is very top heavy right now

Post by rkhusky » Thu Nov 14, 2019 8:55 pm

nedsaid wrote:
Thu Nov 14, 2019 8:39 pm
rkhusky wrote:
Thu Nov 14, 2019 8:30 pm
nedsaid wrote:
Thu Nov 14, 2019 8:23 pm
You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher.
So, Warren Buffett buying up companies, and making Berkshire Hathaway larger, creates more risk for the Total Stock Market? Total Stock Market is riskier with those companies under the Berkshire Hathaway umbrella than when the companies were operating on their own?
The Berkshire Hathaway phenomenon pales in comparison to the effect of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) on the index. What I am commenting on is the effect of High Tech/Internet on the index, Berkshire/Hathaway last I checked was not a Tech Stock. Indeed, I still see B/H in the Value Indexes, so B/H is not suffering from valuation or sentiment extremes. But yes, I would say that when you see concentration like we are seeing now in the indexes, risk is increased. The index is always somewhat top-heavy, the graph shows that it is more top-heavy than normal. The Warren Buffett effect here, while it exists, is relatively mild.
Or it is the affect of the economy changing to a tech-based economy. The FAANG have also been buying up small companies and incorporating their technologies into their offerings.
I don't see more risk in the FAANG companies innovating and producing new products that the public wants to buy.
I don't think that Apple splitting into 5 separate companies would decrease the risk of the Total Stock Market.

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