S&P 50 now nondiversified?

[Spock]

This ^^^ snapshot view of the S&P500 makes things look more scary than it needs to be. Let's say in 10 years, Apple, Nvidia and Microsoft all got bankrupted (imaginary scenario here), the only thing the S&P500 investors care about is the performance of the S&P500 over that time period. If one assumes that the SP500 will crash to the bottom and can't recover (due to the above companies going to zeroes), that most likely will not be the case. One only needs to look back when IBM, GE etc. were the huge stocks within the index that "crashed" into much smaller companies, the SP500 didn't do badly over long period of times while absorbing all those stock crashes. One feature of an index such as the SP500 is the natural cycling-in of strong, high performed companies, AND the natural cycling-out of failed, weaken companies. I am too lazy to check, but I am sure at one point Apple (yes the great Apple) was kicked out of the S&P500 when its stock was value at ~$2/share.
As long as the SP500 will continue to do well, one does not need to worry which stocks are in there.

IBM and GE didn't "crash", they faded out over time and their investors drifted away more so than ran.
While today's MAG7 are really too big to crash, they seem to be a lot more volatile. Today's markets are more manic/depressive... I was at IBM in the 80's onward and it didn't really have the mania stampedes that AI and politics is driving right now.

 

[RetireBy90]

A couple months ago I started seeing articles reporting this issue. I think Sept or Oct I split my large cap AA from IVV (S&P 500) and put 50% of it in RSP (equal weighted S&P 500). I figure I still have exposure to MAG7 but not as much. Just one approach.

 

[SnowballCamper]

Does

Not sure what your point is. Any total market fund or total market index is by definition diversified, containing all the stocks in the subject market, especially if that market is the world, like VT.

The quilt chart really has nothing to do with the question of diversification.

Diversification isn't just stocks.

 

[Koolau]

Diversification isn't just stocks.

Yeah, we're used to thinking of stocks and bonds and cash. There are some pretty esoteric things that can add to diversification. There are also some pretty "normal" things that most of just don't even consider owning as investments.

They all add to diversification though they add some risks and require a fair amount of knowledge to make them successful.

 

[SnowballCamper]

Yeah, we're used to thinking of stocks and bonds and cash. There are some pretty esoteric things that can add to diversification. There are also some pretty "normal" things that most of just don't even consider owning as investments.

They all add to diversification though they add some risks and require a fair amount of knowledge to make them successful.

I'm not thinking of esoteric things. Mainly just the other categories shown in the periodic table that I included, but also that a market cap weighting really concentrates your holdings in the big "hot" stocks.

 

[Al18]

I started diversifying 3 years ago away from the typical SP500 fund and into RSP (equal weighted S&P 500).

 

[OldShooter]

Diversification isn't just stocks.

This thread per the OP, is about stocks.

 

[Spock]

The suggestion I got from from reading is that diversification hinges on asset correlation. The thought was that one needed to hold 12-15 uncorrelated assets. I don't know that I can find 2 or 3, forget about 12.

Various "all weather" portfolios claim broad stock market (30% VTI), intermediate bonds (15% IEF), long bonds (40% TLT), commodities (7.5% DBC), and gold (7.5% GLD) is an uncorrelated portfolio. Maybe in the old pre-intervention days but those days are gone.

But with all the shifting around, uncorrelated today becomes correlated tomorrow. There doesn't seem to be a standard "flight to safety" position anymore that will zig when others zag.

 

[OldShooter]

The suggestion I got from from reading is that diversification hinges on asset correlation. The thought was that one needed to hold 12-15 uncorrelated assets. I don't know that I can find 2 or 3, forget about 12. ... But with all the shifting around, uncorrelated today becomes correlated tomorrow. There doesn't seem to be a standard "flight to safety" position anymore that will zig when others zag.

Yes. That has been the problem all along with Markowitz's arguments. Uncorrelated assets are rare to nonexistent in any broad sense. Fortunately, even a group of mildly correlated assets, like a total market index fund, do protect us small-timers from most excitement.

There are hucksters out there who claim more. The real world, though, is that most of the retail deals offered are fairly stinky. A good clean deal can easily be sold to the professionals like pension funds, so it is only the stinky ones that are left for us little guys. It's just human nature (putting the best construction on it) -- it's easier to sell a few big pieces of a good deal to professionals than it is to roll around in the dirt pitching to clueless FAs and retail buyers. MHO, anyway.

 

[SnowballCamper]

This thread per the OP, is about stocks.

Umm ok, but its about diversification, which isn't just stocks, so what's your point?

 

[Diogenes]

This ^^^ snapshot view of the S&P500 makes things look more scary than it needs to be. Let's say in 10 years, Apple, Nvidia and Microsoft all got bankrupted (imaginary scenario here), the only thing the S&P500 investors care about is the performance of the S&P500 over that time period. ...
As long as the SP500 will continue to do well, one does not need to worry which stocks are in there.

While of course it's true, that an index-holder only cares about aggregate performance of the index, and the vagaries of individual stocks don't matter... in your example, if Apple, Nvidia and Microsoft all go to zero, then... the whole index will suffer... and the suffering will extend well beyond just the S&P.

You're presuming a Schumpeterian creative-destruction, including a churn at the top. One falls, another rises, and in aggregate we flourish. I'm not convinced that that's true anymore. Apple, Nvidia and Microsoft basically run America and the world. That doesn't imply that they're the best investments, or even good investments anymore... But their dominance is qualitatively different than the former dominance of General Motors, AT&T, Standard Oil or U.S Steel. That worries me.

 

[OldShooter]

... I'm not convinced that that's true anymore. ...

Sir John Templeton: “The four most expensive words in the English language are 'This time it’s different.' ”

 

[Diogenes]

Sir John Templeton: “The four most expensive words in the English language are 'This time it’s different.' ”

Yes, I've been hearing words to that effect, for some 40 years. Pithy short quotes stick in the mind, but how true are they?

Small-caps outperformed large-caps, in aggregate, in the entire 20th century. Is it correct to say, that this time isn't any different? US stocks have outperformed ex-US, and then the reverse has happened, in cycles, reliably for some 200 years. Is it correct to say, that this time isn't any different? Residential real estate has largely tracked the progress of inflation, with maybe a slight outperformance, since data first became available, in the late 19th century. But that hasn't been the case for the past 25-some years. Is it correct to say, that this time isn't any different?

 

[ut2sua]

While of course it's true, that an index-holder only cares about aggregate performance of the index, and the vagaries of individual stocks don't matter... in your example, if Apple, Nvidia and Microsoft all go to zero, then... the whole index will suffer... and the suffering will extend well beyond just the S&P.

You're presuming a Schumpeterian creative-destruction, including a churn at the top. One falls, another rises, and in aggregate we flourish. I'm not convinced that that's true anymore. Apple, Nvidia and Microsoft basically run America and the world. That doesn't imply that they're the best investments, or even good investments anymore... But their dominance is qualitatively different than the former dominance of General Motors, AT&T, Standard Oil or U.S Steel. That worries me.

If the US stock market maintains its dominance in the future, some other companies will replace Apple, Nvidia and Microsoft if these were to go down.
If the US stock market won't do well going forward, your concern may be materialized.
My point being it is the US stock market future performance that you are worrying about, not specifically the SP500 and its value concentration in some companies (since the SP500 will most likely be fine if the US stock market continues to be fine going forward).

 

[ut2sua]

Sir John Templeton: “The four most expensive words in the English language are 'This time it’s different.' ”

Yes. They are expensive because it tends to involve selling low (getting out) and later buying back high (or not buying back at all). It has happened to the smartest among us.