Too much S&P 500 index concentration in FAAMGs?

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garlandwhizzer
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Too much S&P 500 index concentration in FAAMGs?

Post by garlandwhizzer »

An interesting article from Charles Schwab pointing out the inherent risk in concentrating too heavily in 5 mega cap LCG winners FAAMGs. Cap weighted S&P 500 index has drifted progressively in that LCG direction for years and now, riding this positive wave with great returns. Now however these 5 stocks account for 24% of the S&P 500 Index. So much concentration in so few names carries specific stock risk. In addition even with optimistic LCG earnings estimates for next year, they carry very high forward PEs especially to value but also to other market segments. This may be a time for investors to at least consider increasing exposure slightly/modestly toward past losers from past winners.

https://www.schwab.com/resource-center/ ... ctor-views

Comments?

Garland Whizzer
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by acegolfer »

Is it concentrated? Yes.

Does it bother me? Not really because I don't see a valid alternative strategy. Pick previous losers? How? Which ones in particular?
jarjarM
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jarjarM »

Pendulum will swing back eventually so SCV will see its day under the sun soon (maybe in less than a decade or so) :oops:

P.S. Yes, I know this doesn't quite answer the SP500 part but just want to put it out there.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by MotoTrojan »

Who knows. I don't hold any of the FAAMG's.
Seasonal
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Seasonal »

Criticism of Concentrated Index Risk Are Off Base
August 21, 2020 8:00am by Barry Ritholtz

Top-Heavy Stock Indexes Are Nothing to Fear
It’s not rare for a small group of equities such as Apple, Microsoft and Amazon.com to account for a large percentage of the S&P 500.
https://ritholtz.com/2020/08/criticism- ... -off-base/
Blue456
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Blue456 »

How is it going to affect buy and hold portfolio?
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jason2459
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jason2459 »

garlandwhizzer wrote: Thu Sep 10, 2020 1:23 pm An interesting article from Charles Schwab pointing out the inherent risk in concentrating too heavily in 5 mega cap LCG winners FAAMGs. Cap weighted S&P 500 index has drifted progressively in that LCG direction for years and now, riding this positive wave with great returns. Now however these 5 stocks account for 24% of the S&P 500 Index. So much concentration in so few names carries specific stock risk. In addition even with optimistic LCG earnings estimates for next year, they carry very high forward PEs especially to value but also to other market segments. This may be a time for investors to at least consider increasing exposure slightly/modestly toward past losers from past winners.

https://www.schwab.com/resource-center/ ... ctor-views

Comments?

Garland Whizzer
I think it just makes more of a case to hold the broader total market vs just the S&P 500 index. Could also help make a case to have some international holdings which diversify away from tech sector. Which there's a good thread by Rick Ferri just this week speaking to that diversification using ex-US.

So, another kudos to Taylor's 3 fund approach.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jason2459 »

jarjarM wrote: Thu Sep 10, 2020 1:27 pm Pendulum will swing back eventually so SCV will see its day under the sun soon (maybe in less than a decade or so) :oops:

P.S. Yes, I know this doesn't quite answer the SP500 part but just want to put it out there.
Rick Ferri's total economy core-4 would definitely help diversify away from the top heavy SP500 which incorporates SCV. Or the classic version with no SCV.
asif408
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by asif408 »

Seems like there are lots of solutions, the best would seem to be to own more international developed and emerging market equities and small cap US equities. If you can't bring yourself to do that, you could own a total US stocks market index fund (it has about a 19% concentration in those stocks) or use a fundamental index fund as suggested in the article (it has about an 11% concentration in those stocks).

I think the only investors that should be concerned are those with a US heavy large cap stock portfolio that have most of it concentrated in an S&P or total stock market index. I imagine anyone with significantly holdings in small US stocks, international developed, and EM stocks is not at risk of being concentrated in the past winners. Now you might keep losing for a while, but at least you are well diversified.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by an_asker »

MotoTrojan wrote: Thu Sep 10, 2020 1:30 pm Who knows. I don't hold any of the FAAMG's.
I am afraid you are missing the point of the article, which is saying that if you hold the S&P500, you are holding too much of the FAAMGs! :oops:
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by MotoTrojan »

an_asker wrote: Thu Sep 10, 2020 1:50 pm
MotoTrojan wrote: Thu Sep 10, 2020 1:30 pm Who knows. I don't hold any of the FAAMG's.
I am afraid you are missing the point of the article, which is saying that if you hold the S&P500, you are holding too much of the FAAMGs! :oops:
I understood the article perfectly. Did I say I hold the S&P500 either?

To elaborate though, yes I do feel there is too much concentration in tech overall. I think tilting to small-value (along with global stocks) is a great solution. I also like fundamental index approach, just wish the expense ratio was lower.
Last edited by MotoTrojan on Thu Sep 10, 2020 2:00 pm, edited 2 times in total.
burritoLover
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by burritoLover »

That's why all-in on the S&P 500 with 0% international is not a well-diversified strategy.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Scooter57 »

I have stopped buying VTSAX (Total Stock Market) for this reason. The top 20 stocks overwhelm the other 3000+ stocks in the index. People naively believe they are buying "the whole market" but you are really putting most of each dollar into s very small number of stocks and fund price responds almost entirely to those megacap movers.

The equal weight indexes don't provide a good alternative. This might actually be a good time to do some sector fund investing as a counterweight to total market and S&P500 top heaviness.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by MotoTrojan »

burritoLover wrote: Thu Sep 10, 2020 1:58 pm That's why all-in on the S&P 500 with 0% international is not a well-diversified strategy.
+1. People often tell me I am not diversified enough since I tilt pretty heavily to value & size, however with 35% in ex-US small/mid-value I sleep much better at night than I would if I were 100% in S&P500.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by MotoTrojan »

Scooter57 wrote: Thu Sep 10, 2020 2:02 pm The equal weight indexes don't provide a good alternative. This might actually be a good time to do some sector fund investing as a counterweight to total market and S&P500 top heaviness.
Why exactly do equal weight indexes not provide a good alternative? I don't think equal-weight is the ideal solution, but curious why you are singling it out here.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by permport »

Own a total world portfolio with factor tilting and this will be a non-issue.

Way more diversified than a U.S. only portfolio, especially one that's just the S&P 500. I don't understand how anyone could possibly have it in their minds that an all-in allocation to the S&P 500 could be considered fully diversified in any meaningful sense.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by nisiprius »

Rats. There was an image posted in the forum within the last few days, out of a book or an article by John C. Bogle, showing that in the 1950s, over 50% of the cap weight of the S&P 500 was in the ten largest stocks. Anyone remember where it was?
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by All Seasons »

nisiprius wrote: Thu Sep 10, 2020 2:07 pm Rats. There was an image posted in the forum within the last few days, out of a book or an article by John C. Bogle, showing that in the 1950s, over 50% of the cap weight of the S&P 500 was in the ten largest stocks. Anyone remember where it was?
I wasn't aware of that. Interesting.
The market portfolio is always a legitimate portfolio.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by MotoTrojan »

permport wrote: Thu Sep 10, 2020 2:05 pm Own a total world portfolio with factor tilting and this will be a non-issue.

Way more diversified than a U.S. only portfolio, especially one that's just the S&P 500. I don't understand how anyone could possibly have it in their minds that an all-in allocation to the S&P 500 could be considered fully diversified in any meaningful sense.
But but but it had the best returns in the last decade!
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by arcticpineapplecorp. »

only 4% of all companies have created all the value of the stock market since 1926:
“The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform,” says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years.

source: https://wpcarey.asu.edu/department-fina ... sury-bills
Also, you can look at 24 years of Big Company changes:
https://americanbusinesshistory.org/lar ... 1994-2018/

the market grew despite previous big companies becoming smaller companies because previous small companies became bigger. The overall pie grew despite big companies becoming smaller.

if the main charge is sector risk, there's reversion to the mean. Some other sector will grow when tech sector is ready to fall.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jason2459 »

nisiprius wrote: Thu Sep 10, 2020 2:07 pm Rats. There was an image posted in the forum within the last few days, out of a book or an article by John C. Bogle, showing that in the 1950s, over 50% of the cap weight of the S&P 500 was in the ten largest stocks. Anyone remember where it was?
I remember seeing it too. Don't remember which thread.

But these I ran across on the webs

Just showing the changes over the years
https://etfdb.com/history-of-the-s-and-p-500/

And by sector weight which in 1957 was 85% industrial sector. Talk about top heavy
https://www.google.com/amp/s/www.busine ... 16-9%3famp
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by nisiprius »

The arguments for mirroring the whole market itself do not have anything to do with how concentrated it might or might not be. So basically, either you agree with the premise of total market indexing or you don't. It doesn't make a lot of sense to say "I will mirror the total market when I think the total market has it right and not when I think it has it wrong." You might as well just pick whatever you think are the best stocks and ignore whatever the market weights have to say.

As for equal weighting, it is grotesquely illogical, because it isn't equal weight at all. It is a decision to put a weight of 1.00 on a seventh of the stocks in the market and a weight of 0.00 on the other six-sevenths. That means you are no longer anywhere close to sampling the whole market based on the way you have chosen to measure the market. Cap-weighting provides a graduated tail-off, so that even with only 500 stocks you are still holding 80% of the market and your results won't vary much from it.

The equal-weight proponents tend to argue from "naïve diversification," i.e. "I don't have any reason to favor one stock over another," but can't give a convincing rationale why it makes sense to hold just as much Flowserve as Apple, but crazy to hold as much Lithia Motors as Flowserve. You don't know whether Flowserve will do better or worse than Apple, so you hold them equally. Well, what do you know about Lithia Motors and Apple that justifies not holding them equally?

Equal weighting also incurs heavy transaction costs--which is why the very first index fund, a private retirement account at Samsonite Luggage, was abandoned very quickly after it was begun.

And, finally, proponents of equal weight are very prone to make an inappropriate comparison of past performance that doesn't take risk into account.

The Invesco S&P 500 Index ETF, RSP

Image

has outperformed a cap-weighted S&P 500 ETF, but it was riskier by all measures of risk, and the Sharpe and Sortino ratios show that the additional return not commensurate with the additional risk. So, pragmatically, equal-weighted funds have not paid off, either.
Last edited by nisiprius on Thu Sep 10, 2020 2:30 pm, edited 3 times in total.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by KlangFool »

OP,


This is normal. LCG leads the way in any bubble. And, if you believe that, you will tilt to SCV to balance it out.


I do not know and do not need to know whether there is/will be a bubble. I tilted towards SCV to prepare for this.

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S&P 500 index concentration in FAAMGs?

Post by Taylor Larimore »

garlandwhizzer wrote: Thu Sep 10, 2020 1:23 pm An interesting article from Charles Schwab pointing out the inherent risk in concentrating too heavily in 5 mega cap LCG winners FAAMGs. Cap weighted S&P 500 index has drifted progressively in that LCG direction for years and now, riding this positive wave with great returns. Now however these 5 stocks account for 24% of the S&P 500 Index. So much concentration in so few names carries specific stock risk. In addition even with optimistic LCG earnings estimates for next year, they carry very high forward PEs especially to value but also to other market segments. This may be a time for investors to at least consider increasing exposure slightly/modestly toward past losers from past winners.

https://www.schwab.com/resource-center/ ... ctor-views

Comments?

Garland Whizzer
Bogleheads:

I am very happy that my S&P 500 Index Fund is invested in the largest and most successful companies on the planet. I see no need to change -- even if I could change without paying the huge capital gains that will be eliminated at my death.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The total market index is by definition the perfect investment, and the S&P 500 is virtually as good. They cannot be improved on. They will give you virtually all of the market's return, provided that the costs are minimal. No other form of indexing will give you that."
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Boglegrappler »

Early in the year I did some analysis comparing the weighting of the top stocks by market value with the "weighting" that you derive when you look at their sales and earnings as a percentage (weight) of the S&P 500 total. I also looked at the recent growth rates in earnings and sales.

When you do that, you get a lot more comfortable with the "over concentration". Taylor Larimore's comment about the largest and most successful companies is a different way of saying this.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by firebirdparts »

Blue456 wrote: Thu Sep 10, 2020 1:32 pm How is it going to affect buy and hold portfolio?
Well, it's easy to predict the past. It affected the portfolio in the past in that you made lots and lots of money holding this stuff. Lots.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Seasonal »

Either you are better able to value companies and construct portfolios than the market or you are not.

Not very many people have a successful track record of consistently being better than the market, but you might be one of the fortunate few.

Act accordingly.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jason2459 »

jason2459 wrote: Thu Sep 10, 2020 2:25 pm
nisiprius wrote: Thu Sep 10, 2020 2:07 pm Rats. There was an image posted in the forum within the last few days, out of a book or an article by John C. Bogle, showing that in the 1950s, over 50% of the cap weight of the S&P 500 was in the ten largest stocks. Anyone remember where it was?
I remember seeing it too. Don't remember which thread.

But these I ran across on the webs

Just showing the changes over the years
https://etfdb.com/history-of-the-s-and-p-500/

And by sector weight which in 1957 was 85% industrial sector. Talk about top heavy
https://www.google.com/amp/s/www.busine ... 16-9%3famp
Still looking but found this from 2019
viewtopic.php?t=284550
SimpleGift wrote: Sun Jun 30, 2019 5:48 pm With all the attention in the financial press these days to the dominance of the FAANG stocks and the decline in the number of publicly-listed U.S. companies, one might wonder: Is the market weight of the top companies today more concentrated than it has been historically?

Last week, a fellow chart enthusiast sent along the two graphs below. The first shows the historical weight of the top-10 S&P 500 companies by market cap for the (almost) 40-year period since 1980. Their market weight last Friday was 21.6%.
  • Image
    Source: S&P Dow Jones
The second chart shows the historical weight of the top-5 S&P 500 companies over the 55-year period since 1964. Their market weight last Friday was 14.6%.
If anything, it appears the U.S. market has become less concentrated at the top today than in the 1960s and 1970s.

Thoughts?
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Seasonal »

Seasonal wrote: Thu Sep 10, 2020 1:30 pm
Criticism of Concentrated Index Risk Are Off Base
August 21, 2020 8:00am by Barry Ritholtz

Top-Heavy Stock Indexes Are Nothing to Fear
It’s not rare for a small group of equities such as Apple, Microsoft and Amazon.com to account for a large percentage of the S&P 500.
https://ritholtz.com/2020/08/criticism- ... -off-base/
Since hardly anyone clicks through:

Image
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Forester »

garlandwhizzer wrote: Thu Sep 10, 2020 1:23 pm An interesting article from Charles Schwab pointing out the inherent risk in concentrating too heavily in 5 mega cap LCG winners FAAMGs. Cap weighted S&P 500 index has drifted progressively in that LCG direction for years and now, riding this positive wave with great returns. Now however these 5 stocks account for 24% of the S&P 500 Index. So much concentration in so few names carries specific stock risk. In addition even with optimistic LCG earnings estimates for next year, they carry very high forward PEs especially to value but also to other market segments. This may be a time for investors to at least consider increasing exposure slightly/modestly toward past losers from past winners.

https://www.schwab.com/resource-center/ ... ctor-views

Comments?

Garland Whizzer
I believe making no money from March 2000 to 2013 is a problem which could have been moderated with diversification (SCV, bonds, gold, REITs, ex-US etc etc). The problem isn't so much that big stocks dominate the index; it's that the index is all US megacap.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by sycamore »

nisiprius wrote: Thu Sep 10, 2020 2:07 pm Rats. There was an image posted in the forum within the last few days, out of a book or an article by John C. Bogle, showing that in the 1950s, over 50% of the cap weight of the S&P 500 was in the ten largest stocks. Anyone remember where it was?
Maybe it was this post from JoMoney in the thread on S&P 500 included 94.81% of the market at inception
JoMoney wrote: Sun Sep 06, 2020 3:14 pm This might also be of interest:

http://johncbogle.com/speeches/JCB_IASC0603.pdf
Image
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jason2459 »

sycamore wrote: Thu Sep 10, 2020 4:43 pm
nisiprius wrote: Thu Sep 10, 2020 2:07 pm Rats. There was an image posted in the forum within the last few days, out of a book or an article by John C. Bogle, showing that in the 1950s, over 50% of the cap weight of the S&P 500 was in the ten largest stocks. Anyone remember where it was?
Maybe it was this post from JoMoney in the thread on S&P 500 included 94.81% of the market at inception
JoMoney wrote: Sun Sep 06, 2020 3:14 pm This might also be of interest:

http://johncbogle.com/speeches/JCB_IASC0603.pdf
Image
That was it and I remember laughing at what nedsaid posted after.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by 000 »

I know you SCV guys are chomping at the bit for your day in the sun...

But somehow I don't think SCV (aka Regional Banks) is the answer to too much in Big Tech.

Sorry...
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by whereskyle »

Boglegrappler wrote: Thu Sep 10, 2020 2:51 pm Early in the year I did some analysis comparing the weighting of the top stocks by market value with the "weighting" that you derive when you look at their sales and earnings as a percentage (weight) of the S&P 500 total. I also looked at the recent growth rates in earnings and sales.

When you do that, you get a lot more comfortable with the "over concentration". Taylor Larimore's comment about the largest and most successful companies is a different way of saying this.
+1

If I weren't using Google Chrome on my Apple iPhone to buy things from Amazon while watching Netflix all day on my days off (while my wife looks at Facebook's Instagram), and if I weren't using Microsoft Outlook and Word all day on my days on, I would be much more concerned.

Rather than causing worry, the way the market seems to reflect the companies I interact with most on a daily basis simply reinforces my confidence in the wisdom of a market-cap-weighted portfolio.

Tesla is another story...
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by rgs92 »

Cap-weighting has worked just fine over the long term so I trust it will work going forward.
It forces you to buy stocks that seem to be overvalued but in reality are relatively early in a major run-up.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by physixfan »

JoMoney wrote: Sun Sep 06, 2020 3:14 pm This might also be of interest:

http://johncbogle.com/speeches/JCB_IASC0603.pdf
Image
Very interesting!
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jarjarM »

000 wrote: Thu Sep 10, 2020 5:07 pm I know you SCV guys are chomping at the bit for your day in the sun...

But somehow I don't think SCV (aka Regional Banks) is the answer to too much in Big Tech.

Sorry...
Don't burst our bubble. :twisted:
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by ososnilknarf »

I don't know what your asset allocation is, but say for example it is 60% S&P, then 25% of that is only 15%, divide that by the 5 top stocks (oversimplifying, I know, but ballpark) and you have about 3% in any single stock. That is not an overweight position in a single stock in my opinion.
It is even less if you have some percentage of your equities in international or anything other than S&P.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Ferdinand2014 »

garlandwhizzer wrote: Thu Sep 10, 2020 1:23 pm An interesting article from Charles Schwab pointing out the inherent risk in concentrating too heavily in 5 mega cap LCG winners FAAMGs. Cap weighted S&P 500 index has drifted progressively in that LCG direction for years and now, riding this positive wave with great returns. Now however these 5 stocks account for 24% of the S&P 500 Index. So much concentration in so few names carries specific stock risk. In addition even with optimistic LCG earnings estimates for next year, they carry very high forward PEs especially to value but also to other market segments. This may be a time for investors to at least consider increasing exposure slightly/modestly toward past losers from past winners.

https://www.schwab.com/resource-center/ ... ctor-views

Comments?

Garland Whizzer
Zero concerns. 100% S&P 500 here. It wasn't that long ago that owning 500 stocks was over diversification (Benjamin Graham discussed owning 20-30 stocks). If the top 10 falter or at least come down to earth, it may drag the whole pile with it for a short while, but some new cream company will rise to the top. Seems to me its all part of the natural process of capitalism. Even if you own the other 3,000 companies, it doesn't even move the needle. In the 1950's the top 10 were over 50% of the total. I just make sure I have enough T-bills so I can hold on tight through thick and thin.
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by nisiprius »

sycamore wrote: Thu Sep 10, 2020 4:43 pm...Maybe it was this post from JoMoney...
JoMoney wrote: Sun Sep 06, 2020 3:14 pm This might also be of interest:
http://johncbogle.com/speeches/JCB_IASC0603.pdf
Thank you! Bookmarked.

And it should not escape notice that despite that incredible concentration, 1950 also was near the start of a very good bull market. The market roughly quadrupled in seven years, which works out to something like 20% per year.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
000
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by 000 »

jarjarM wrote: Thu Sep 10, 2020 5:36 pm
000 wrote: Thu Sep 10, 2020 5:07 pm I know you SCV guys are chomping at the bit for your day in the sun...

But somehow I don't think SCV (aka Regional Banks) is the answer to too much in Big Tech.

Sorry...
Don't burst our bubble. :twisted:
What bubble?? :twisted: :twisted:
jarjarM
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by jarjarM »

000 wrote: Thu Sep 10, 2020 8:50 pm
jarjarM wrote: Thu Sep 10, 2020 5:36 pm
000 wrote: Thu Sep 10, 2020 5:07 pm I know you SCV guys are chomping at the bit for your day in the sun...

But somehow I don't think SCV (aka Regional Banks) is the answer to too much in Big Tech.

Sorry...
Don't burst our bubble. :twisted:
What bubble?? :twisted: :twisted:
freudian slip :oops:
MotoTrojan
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by MotoTrojan »

000 wrote: Thu Sep 10, 2020 5:07 pm I know you SCV guys are chomping at the bit for your day in the sun...

But somehow I don't think SCV (aka Regional Banks) is the answer to too much in Big Tech.

Sorry...
QVAL holds no banks.
000
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by 000 »

MotoTrojan wrote: Thu Sep 10, 2020 8:57 pm
000 wrote: Thu Sep 10, 2020 5:07 pm I know you SCV guys are chomping at the bit for your day in the sun...

But somehow I don't think SCV (aka Regional Banks) is the answer to too much in Big Tech.

Sorry...
QVAL holds no banks.
At 0.49% ER, I'd rather own individual stocks.

Ironic that people are willing to pay 0.49% ER to "BUY THE CHEAPEST, HIGHEST QUALITY VALUE STOCKS" [emphasis mine].
aristotelian
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by aristotelian »

If true you would think that cap weighted S&P500 would have more volatility than equal weight, but in fact the opposite has been true.
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abuss368
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by abuss368 »

I have no worries at all and glad to own a piece of some of the most successful companies.
John C. Bogle: “Simplicity is the master key to financial success."
iamlucky13
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by iamlucky13 »

Seasonal wrote: Thu Sep 10, 2020 1:30 pm
Criticism of Concentrated Index Risk Are Off Base
August 21, 2020 8:00am by Barry Ritholtz

Top-Heavy Stock Indexes Are Nothing to Fear
It’s not rare for a small group of equities such as Apple, Microsoft and Amazon.com to account for a large percentage of the S&P 500.
https://ritholtz.com/2020/08/criticism- ... -off-base/
How many of the past top 10 are still in the top 10?

Obviously it's a trick question, but the companies that make up the largest proportion of the market obviously change over time. That doesn't mean we should be afraid to hold them or need to underweight the S&P 500. I guess for me it's mostly an academic exercise to be aware that going forward, these are unlikely to continue in the future to be the companies that contribute the most to the S&P 500's total returns.

So the Schwabb article raises my eyebrows, and I take a little bit of comfort in holding Total Stock Market instead of the S&P 500 alone.

However, they track so close that clearly it's not worth getting hung up on this point, and it seems the decline of the current top 10 is generally offset by the growth of the future top 10. Mr. Ritholtz made a similar point, I see. Since I don't have a way to determine which of the current top 10 will fall at what time, and which of the other 490 will be the next top 10 that I should overweight, I don't worry too much about.

I might consider a small cap value tilt, though. I'm still undecided, and not in a rush to make a decision.
HawkeyePierce
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by HawkeyePierce »

So FAAMG are 24% of the S&P500.

If you hold an 80/20 portfolio with 30% in international, they're now 12% of your holdings. Much less of a concern.
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Stef
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Stef »

I would concern me if I were a 100% US stock only holder.

But we all know that diversification is important. Owning 60-80% US total market, 20-40% international in stocks and 0-20% bonds will reduce your exposure down to 9-15%.
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Robert T
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Re: Too much S&P 500 index concentration in FAAMGs?

Post by Robert T »

.
Apple, Amazon, Microsoft, and Google have momentum (top holdings of iShares USA Momentum, together with Tesla). Will this momentum be self-reinforcing? i.e. the increasing popularity of momentum investing (more momentum funds) bidding up the prices of these stocks which attracts further fund inflows. But as we saw in 1999, momentum can also come to an abrupt halt.

I don’t think the current environment passes all four of Bernstein’s criteria for a bubble, but perhaps passes some of them for some stocks. As I understand his 4 criteria area:
  • 1. Primary topic of social gatherings
    2. Skeptics of these stocks are met with anger
    3. Extreme price predictions of these stocks
    4. People quit their jobs to speculate on these stocks
Although you do see more posts on Bogleheads about buying individual stocks – specifically Apple, Tesla, and Amazon (e.g. TSM is good, no S&P500 is better, no a US Growth fund is better, no Amazon and Apple are better, no actually Apple is best)…, skeptics of some of these stocks are being drowned out/seen as unenlightened (e.g. people who don’t believe Tesla warrants a 1000+ P/E ratio don’t understand the company – re: its not just a car company but an energy company, insurance company, and technology company etc…). I have not seen extreme predictions for these stocks (although there seem to be some extreme predictions on future earnings given current prices), and while people have not been quitting their jobs, there seems to have been an increase in trading with COVID lockdowns – (e.g. Robinhood, but perhaps not exclusively in these stocks).

For index fund holders, to me it seems strange that increasing stock concentration seems celebrated by some as a good thing (e.g. even 51% in the top 10 stocks is okay?). The World Stock Market provides better diversification (e.g. ACWI has lower stock concentration).

But some very successful long-term investors prefer stock concentration, and some ‘value’ investors hold some of these five stocks in even more concentrated form.
  • Warren Buffet (Berkshire): 44% in Apple
    Li Lu (Himalayan Capital): 24% in Facebook and Google
    Chris Hohn (TCI Fund Management): 32% in Google and Microsoft
Will S&P500 stock concentration continue to rise, or decline - anyone’s guess. Almost by definition, declining shares seems to imply “value” beats growth, and increasing shares seems to imply “growth” beats value.

My preference though is a globally diversified smaller cap value tilted portfolio. A long-term holding (no changing allocations based on valuations). That has helped me achieve my long-term return target so far.

Obviously no guarantees.
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