Given the several recent threads on stock market concentration, I had not seen discussion of this recent opinion piece
in the wall street journal by Burton Malkiel, Indexing Is Still the Best Bet for Investors
that addresses these concerns of stock market concentration. Selected quotes from the article:
Many [active fund managers] have lately argued that simple indexing is a bad strategy in today’s environment because the stock market is dangerously “narrow.” Seven stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla—constitute close to 20% of the S&P 500’s value and have been responsible for almost 90% of the index’s gains this year. ... The simple index investor, the active managers warn, will soon be overly concentrated in a small number of stocks that are overpriced ...
This argument is wrong. Indexing a stock portfolio through a low-cost fund remains the best way to participate in the stock market.
Malkiel explores similarities of today's valuations and concentration with those of the late 1990s and it's aftermath, the tech wreck,
Index investors got banged up. Tech stocks got crushed.
But did indexing really fail? The evidence suggests it didn’t. From 1990 to 2009, ..., a broad U.S. stock market index fund outperformed the average actively managed equity fund by almost 1% a year.
Certainly there are some similarities today to the economic environment of the dot-com era of the late 1990s. Technological innovation promises to transform our economy. ... There is no doubt that U.S. equities are richly valued in part because of the promise of AI. ... It may be that hype over the promise of AI has inflated these multiples to unwarranted heights. But it is also possible that they simply reflect the enormous potential of AI to transform the way the world’s work is done.
Malkiel asks if rich valuations means the market is no longer efficient.
The basic idea of efficient markets isn’t that prices are always correct. In fact, they are always wrong. What efficiency implies is that information is reflected in prices without delay. And the current tableau of market prices reflects the combined judgment of hundreds of thousands of investors, including those of the research departments of the most influential firms on Wall Street—as well as the galaxy of active managers who run mutual funds and institutional portfolios.
It isn’t impossible to beat the market. But if you go active, chances are you’ll underperform. Years of evidence in a variety of market environments confirms the wisdom of indexing. And if you do decide to alter your portfolio from market weightings, you can do so with much less risk if your active bets are made around a core portfolio that is broadly indexed.
Malkiel didn't use the phrase, stay the course, but I think he means pretty much just that.