Is the S&P 500 Too Concentrated?
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- čas přidán 28. 06. 2024
- Some have become concerned with the concentration of the S&P 500 amid the dominance of stocks like the "Magnificent 7." We'll dive into how concentrated the index really is in today's video.
DISCLAIMER: This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).
NOTE - In comparing the S&P 500 to other market indices, it's worth highlighting that every other country has a smaller constituent count, so a higher top 10 concentrated would be expected.
While the point I was hoping to communicate was that investing in these international indices would result in less diversification than investing in the S&P 500, this is an important caveat I didn't emphasize in the video. Apologies.
Thank you for the clarification. :)
Investing internationally is less diverse than the s&p 500 alone?
Xtra has products like Eurostoxx that do the same as the S&P for the eurozone. Like the top 50 and top 600. You can also get ETFs for example from Amundi or Van Eck that track grouping of European companies. National indexes are smaller, but then so are most European economies. The bigger ones like Britain have the FTSE 100 and 200. While Portugal has the PSI 20.
@@Kep19901 if you only infest in e.g. the DAX40 : yes s&p is more diversified - if you invest lets say 90% S&P500 and 10% into DAX40 you are obviously more diversified
@@Kep19901most of the S&P 500 is massive global companies. Apple, Google, Microsoft, Amazon, Facebook etc are all global companies, so from a consumer perspective is very global. If I invest in the FTSE100 then a significant amount of exposure is UK focused. FTSE250 even more so, so you would have in some ways less diversification geographically
This is the most dry and straightforward finance channel but I love it. Thank you!
Just like a plain bagel!
As it should be!
As all good finance channels should be. If its anything else its more etertainment than informative
What are the best additions to a $500k portfolio to boost performance? S&P 500 is Up and will do better in 2024 I believe as indicators for profits continue to improve, investors like me believe that “Santa has come early” to the markets.
I think you're better off with majority investment in S&P500 and uprising equities cos they always outperform. Alternatively speaking to a certified market strategist can help with pointers on which to acquire
No doubt, having the right plan is invaluable, my portfolio is well-matched for every season of the market and recently hit 100% rise from early last year. I and my CFP are working on a 7 figure ballpark goal, tho this could take till Q3 2024.
Marisol Cordova is the licensed advisor I use. Just research the name. You’d find necessary details to work with to set up an appointment.
I appreciate this share. I set up a call with her and I am keen on getting to talk to her particularly. Lady looks really great though even with the exams and other stuff.
I like the plain bagel ❤. You accurately portray just how "boring" stable and reliable investing is. No exaggerated excitement, no " way to make a quick buck", just plain old knowledge.
lol, if the s&p 500 crash by 63% it doesn‘t matter in what you are invested at all
Buying opportunity of all time.
Its like the playing field crashes
That is just not true at all. The crux of it all is what you compare your investments to. What is your benchmark. For me, the point is to compare my investments to some alternative investment decision, such as the global index. If the global economy crashes but my investments are outperforming the global index, then I see that as a success. Even if my investments are also tanking. If the S&P500 would be outperforming my chosen benchmark, then that is a good investment compared to that benchmark.
@@tapio_m6861 you want a benchmark for the benchmark?
@@tapio_m6861 not sure in what you are investing but if the s&p 500 crashes 63% stock marked is down as a while and not sure if you care about 63 vs 60 % loss at this time.
We are all so blessed to have such researched, nuanced, and simple explanations delivered to our front door for free. Thanks ThePlainBagel!
I have a 3 fund portfolio consisting of 33% S&P, 33% Total stock, and 33% international. I feel a need to focus on complete growth so I went 100% stocks, but does the SP500 and TSM overlap too much to make sense holding both? However I’ve been in the red for a month now. I work hard for my money, so investing is making me a nervous sad wreck. I don’t know if I should sell everything, sit and just wait but watching my portfolio of $450k dwindle away is such an eye -sore.
There are many other interesting stocks in many industries that you might follow. You don't have to act on every forecast, so I'll suggest that you work with a financial advisor who can help you choose the best times to purchase and sell the shares or ETFs you want to acquire.
I actually subscribed for a few trading courses but it didn't help much, been getting suggestions to use a proper financial advisor, how did you go about touching base with your coach?
Thank you for this Pointer. It was easy to find your handler, She seems very proficient and flexible. I booked a call session with her.
If we are at the peak, you could see losses increase for one to two years and then go up again (your losses will decrease till you go to profit). We are though in a faster market now so i expect faster reactions.
Have you considered market-linked GICs? Stock market participation while guaranteeing your principal.
My investment into the S&P 500 isn't active because I expect it to outperform anything. It's passive because it's "a safe bet" and I'll be in the same boat as everyone else. I don't care if I out-perform anyone; I care if I under-perform everyone.
That's still an active choice: you're not trying to beat anyone else, but you're still expecting a good positive return.
It's not a safe bet to invest only in the stock market of a single country.
The active part of that happened when you decided to invest in the S&P500. The second active decision is whether you keep on investing on it or not. The rest is passive.
The passive side of it is that you aren't making individual investing choices within that S&P500 index, but the choice of using that index in the first place is an active choice.
@@davec3974 Arguably S&P500 companies are so heavily part of the whole global economy that investing in it also gives you a strong exposure to the whole global economy.
That single country is the underlying of the capitalist world economy @@davec3974
7:48 well theres also the difference in size. For example the german Inder (DAX) only tracks 40 companies..
Most national indexes in Europe track 20 to 50 stocks. The equivalent for the S&P 500 in Europe would be the Eurostoxx 600. Being the 600 largest companies in the EU.
I learn SO MUCH from this channel. Thanks, Richard. :)
Hello Richard!
Can’t get enough of your videos! Thank you!
The video’s title question read my mind! Thanks for sharing your thoughts.
Once you understand the Efficient Market Hypothesis, you realize that unless you can do "price discovery" better than hedge funds and algorithms (hint: you can't), the best strategy is to free-ride on *their* price discovery by sticking to market weights.
Buy VT and enjoy life.
Market weights, what’s that mean?
The only exception is if you had domain specific knowledge. If you knew something about a company that almost no one knows, but isnt technicaly insider trading. For instance, if you are a senator thats just been informed that a pandemic is about to hit your country. Or if you are a cardiologist working for the american heart association, and you know that a drug will soon be recommended to be prescribed to 60% of the US population.
I think there’s a major misunderstanding about active investing or even dare I say it trading. I don’t need to beat the S&P I need to consistently make more cash than my lender demands in interest. But they don’t want it later they want it now. So it’s apples and oranges. Which is why it’s bad that it’s marketed the way it is on the internet, good luck trading without an eye watering amount of leverage. And good luck trying to learn using an eye water amount of leverage. Tough sport.
@@CromLine It's investing based on the value of each stock compared to all stocks. So if 4¢ of every dollar in the global equity market is invested in Apple, you also invest 4¢ of every dollar in Apple.
@@michelchamoun9967 True. The "soft" Efficient Market Hypothesis claims that all *public* information is reflected in prices, but if you have non-public information, all bets are off. That'd be rare for most investors, though. I for one have never had and don't expect to have investable non-public info.
I prefer broader funds like ITOT or VT for the diversification. The S&P had a “lost decade” from 2000-2009, but smaller and foreign companies kept chugging along. Then Europe had a lost decade roughly 2008-2018 and the US was doing well. I couldn’t say what’ll outperform, but the imperfect correlation between market segments can reduce the swings somewhat.
I agree about broader total market funds.
Go look at top holdings of ITOT same as SP 500
I didn't know about the VT, I'll probably add it to my portfolio. I've been wondering about an index like that.
@@masi9044Sure, large caps are part of the total market, in fact they’re the largest part. But ITOT, VTI, or IWV also put about 20% toward small- and mid-caps. That provides a bjt of diversification, and if that small-cap premium comes back investors will benefit.
VT takes this a step further and expands globally with a floating market cap. The US is currently about 60% of global equity, so it’s 60% of the fund. The other 40% is spread across lots of other countries. Market cap weighting means the fund adjusts as the markets do, so if Brazil’s economy takes off it’ll automatically become a bigger part of the index.
@@masi9044 Right, because these funds are _supersets_ of an S&P 500 fund. The S&P 500 make up about 80% of a total US market fund (like ITOT) and just under 50% of a total global market fund (like VT). That other 20-50% is important though, as it provides further diversification.
Richard is one of maybe three CZcamsrs that I will 100% click on every single time I see a new video. Keep up the good work!😀
Distillation of information in a concise and straightforward manner without oversimplifying or feeling the need to use buzzwords (which underlines insecurity I think) should deserve a Nobel Prize category, always a pleasure man..
Thank you and thank you, Richard! Cheers from Toronto.
These videos are always a great refresher at the very least, but more often than not I learn something.
Well done. I appreciate your clear sense of ethics.
Would have loved to see you bring up the sector weightings when discussing S&P's current multiple in comparison to other stock markets. The S&P has a much higher tech weighting then other global indexes, and then it had historically. Since tech tends to have higher mults this explains a lot. When you look us valuations vs global valuations adjusting by sector, US is not as expensive as the raw CAPE shows.
Which brings up an interesting question: are there S&P500 indexes that have put a weight-cap on industries or individual companies so that the index doesn't become so heavily dependent on tech?
As usual your level of quality is very high, thanks for the vid!
Always first class explanation and commentary. Love it.
Canadians now have access to a variety of internationally diversified index ETFs. This can help if you’re concerned with country concentration. It’s a meme at this point but JUST BUY VEQT/XEQT/ZEQT (or one of the bond inclusive varieties).
once trudeau is gone i will buy xeqt.
@@Vancouver_Island_Guy the prime minister doesn’t control the stock market let alone the global stock market my man. Time in the market beats timing the market so waiting is not advised for a long term investor. The second best time to invest is today. The best time is 20 years ago.
XEQT is up 48% over the last 5 years so IF the prime minister did control the global stock market I’m not complaining.
@LoganT101 go on telling yourself that lol. Energy is a huge part of our economy and if you can't figure out trudeaus policies are screwing that up well you are lost. Check out energy sector prices here the past few years.
@LoganT101 btw I'm up way more than 48% in 5 years. I'm up 66% since just since Jan 1st invested in nvidia. Way more than that over the past few years. I don't need advice on investing but thanks anyways. Snp 500 is where you should put all your cash into. AI revolution is ramping up more and the mag 7's ain't going anywhere. Investing in the tsx the past few years have brought very poor returns. You thing the 48% return from xeqt since its inception is from the tsx lmao. 90% of the gains are from the US total market ITOT.
@@Vancouver_Island_GuySee, what you’re doing here is investing based on recent past performance. 5 years is nothing for the stock market. Congrats on the returns, but chasing past performance is more likely to lead to underperformance in the long run.
Friday PB uploadzie? It's turning out to be a great weekend.
I utilize S&P500 ETFs, and its been good for me so far, so this is some good stuff to keep in mind. Thanks!
Thank you! Always learning something new from you
Great topic choice. I appreciate you taking the time to break this down.
The thing is, active investors should love passive investors. If it is true that passive investors are massively overvaluing certain companies, that's a distortion that the active investors can exploit. The issue is that there are too many active managers to justify their fees, and they should simply find something else to do!
Thank you Mr.Bagel! Love this channel!
I've been watching your channel for the last few years and honestly it's always great content. It's like I'm in a college class with how these explanations are!
Great content 👍 one of my favorite finance channels 🙂
Amazing explanation! Very clear and concise!
Such a good analysis as usual. Thank you for educating us
Thanks for putting the effort into this video, I appreciate it.
Great information and well presented. Love this channel.
Well researched and presented. Appreciate your video. Thank you.
As a person who watches your videos on occasion, I was expecting you to state the obvious about the magnificent 7 and agree on the level of concentration. Very impressed you took the time to go a lot deeper than just quoting S&P historical data and actually reviewed alternatives both domestic and internationally. Felt like it gave me a complete understanding. Thank you @theplainbagel
You read my mind😂 yesterday I was wondering this, debating if I should get SCHG when I already have VOO, and worrying about a lot of overlap between the two. I couldn't really put it into words to search for, so it just went to the back of my mind and today BAAM your video shows up in my feed!
The concentration comparison with other indexes such as Germany's Dax and France's Cac is not valid since those are much smaller, in this case comprised of only 40 companies, if one would adjust for the size you would get a much smaller reading. If you take a look at the top 10 companies in stoxx 600, which is a closer comparison both by number of stocks and economy size you would get ~20%
love this breakdown! the downsides and risks associated with large exposure to the mega cap stocks can be mitigated by total market funds like VTI, which is also the more "passive" move and closer to actual US market. Ben Felix has an excellent video on this
Love this sort of video, I hope to see you talk about the S and P 500 more
Love your videos mr. Bagel. They gave me the minimum requirements for me to do my own research and understand investment books.
Awesome video! Thanks for that!
Thanks for the market wisdom!
So much good information in this video, thank you !
Thank you for sharing the info. I’m just getting started with investing definitely would love to hear more info like this!!
Nice that you start! As said in the video, it is not advisable to invest only in the S&P. It is concentrated and lacks international diversification. I would recommend the Rational Reminder community (or podcast/Ben Felixs CZcams channel) and bogleheads. The general consensus in those communities is essentially investing in low-cost, well diversified index funds like VT. Hope that helps 🙏
Thanks! Great analysis and information!
Great video. Thank you for making it.
Thank you for getting into the details of boring, but important stuff.
Very useful video for beginners like myself. I appreciate your guidance
Richard, excelent video. Thanks a ton.
Thanks for the video :)
Thank you. This was helpful.
Great commentary Richard. I know it’s not financial advice but I’m curious whether you invest in an equal weighted or market weighted S&P500 etf/index for yourself?
Great video. I concur with the fact that investing only in the s&p500 may not be enough.
I would diversified with small caps and specific regions (european markets, japanese or indian).
I find regional markets to be a waste of time. I’ve had money in there for years with barely any gains. All of my returns have come from US.
Great insights
Thanks
Also, check that the fund you invest in physically replicates the index (i.e. by actually buying the shares) rather than synthetically replicating the index by entering into derivatives with counterparties where you are taking the counterparty credit risk. Big difference if things go wrong.
Naive question, but do vanguard etfs have this issue? VOO, VTI, all the others being mentioned in the surrounding comments?
@@Drachensslay Those Vanguard funds replicates the index and aren't synthetic.
Really usefull and interesting, keep posting geat informational content!
I pretty much just go all in on VTI. Its mostly the SP500 since it's weighted by market cap, but I still get exposure to the rest of the US stock market.
I started with VTI in my ROTH until I got it to 3k, then I switched it over to VTSAX.
@@serialchiller4522Why did you switch? What is the benefit of a mutual fund over an ETF?
VTI fan here, if I could only invest in one ETF it would be VTI or SCHD.
I'm a VTI VXUS enjoyer, why invest in 4.000 companies when you can invest in 10.000?
VTI/VXUS for the Win!
Thank you for this!
Great vid. Subscribed.
I think an important point with these very large companies echoes what Warren Buffet recently said, and that was that "the larger you get the harder it is to shift the needle". I would love to see what less concentration would actually do to overall growth in the long run.
I'd love to see a video going into the details of large, mid, and small cap investments and their indexes that goes into their historical returns and their place in a diverse portfolio. In recent years large cap has performed the best, but from what you shared here it sounds like that's not a guarantee.
Amazing video! Great analysis and alternatives to SP500!
Excellent content! Great points about the increasing concentration in the indexes, especially the S&P 500, a potential bubble, and the incentives of fund managers. Most people just say to invest S&P 500, but total market funds are a little better diversified. And the S&P may miss out on returns from small cap value stocks and the reduced correlation from international stocks. Plus, since the funds are market cap weighted, the S&P gets you the most expensive businesses, and higher price means potentially higher risk and lower returns. But S&P is a decent option, and it's about whatever works best for each person's goals.
Thanks Richard!
Good video!
Hell yeah two of my interests colliding
7:52 yes germany has a high concentration of the top 10 stocks, but it only has 40 stocks in total in their country index (dax). S&P has 500 stocks, so this isn't a suitable comparison.
Good point, an oversight on my part. I’ve pinned a comment to highlight the added detail.
Thank you!
Ive had this question on my mind recently! Praise be unto the plain bagel!
Do you have a specific way you like to be cited or are your CZcams link/video links enough?
He has an OnlyFans
I encourage reading the "Tails, you win" chapter in Morgan Housel's Psychology of Money
Appreciate your content.
Could you do a video on the CANSLIM strategy of investing/trading?
The concern for bubbles related to index investing is valid, but largely the current and FWD P/Es don't seem unreasonable other than a couple absurd outliers.
I invest in a global all cap fund . Despite being a global index fund, it’s still heavily concentrated into the magnificent 7
Another good education video as always
thank you sir. Yes, Small Cap will beat s&p 500 in the longer run
would love to hear your opinion on holding cash within a portfolio
This is why I invested in a mix of the Russel 2k, a micro cap etf and my favorite one of all the $XBI Biotech etf.
Great analysis!
thank you for the intelligent, non-alarmist takes
Do you have any recommendations for a more balanced alternative? - sorry, hadn't finished yet, I'll look at your recommendations -
Great content
I did a bit of research into how well fundamentals per industry can explain variance in stock prices using a bunch of different methods from simple linear models to neural nets. I did this thinking it would retain more explanative power than statistical models, which lost basically all predictive power once high frequency trading was widespread. The rise of capital inflow inti ETFs is super strongly correlated with the decrease in variance explanation, minus a few sectors. Like, super stark. Like, 420x between 1987-2003 versus 12x between 2003-2019. It was nuts
the issue is whether the stocks in SandP are correlated or not. if they are, expect problems.
This is in part the reason why I prefer total market funds like VTSAX to an S&P fund. My thesis as a passive investor is that I can't identify what stocks will be the best to invest in, so I'll buy everything and take the average return. This does mean I'm betting on the overall US economy which I feel is a relatively safe bet, but I've also invested some in international index funds as a hedge.
Yes, it is very concentrated.
At best one might refer to it as the S&P50, but more realistically it is more the S&P25
there is an equal weighted version of the s&p500 (rsp is an etf version)...the problem is it underperforms on both a total returns basis and a risk adjusted returns basis.
Can you do a video about candlestick patterns and predictions? Would love to hear your thoughts
thanks
Outperformance in one decade often results in an underperformance in the next. In both of Burton Malkiel's and Daniel Crosby's books they address this and the best process for handling these flat/side-ways or downward periods, namely by indexing with equal weight across international markets and rebalancing annually. I'm totally sold on that idea and have it implemented in my portfolio. Furthermore they both advocate for allowing the speculative side of you to come out but to limit it to 5% of your portfolio; advice I also like.
Now I'm imaging a mrta-index fund that takes positions in the collection of index funds...
How much diversification would it be to split one's money among the various S&P indeices? I'm interested in running back the numbers to see how this would have performed compared to having chosen each of them over 10, 20, 40 years.
Enjoy your vids!!
Insightful
Subscribed!
What about investing in factor funds as a way to combat some of the downsides of investing in a market capitalization weighted index?
This is a bit of a specific topic but I wonder if you would consider talking about how it's possible for a company to offer a 0% expense ratio index fund, as Fidelity does with their various passive index funds. Is there some hidden risk involved with choosing one of these zero-expense funds versus a traditional fund like Vanguard with some non-zero but small expense ratio?
I put a significant portion of my 11 YOs investments into 25%
Each of VB, VO, VOO and VXUS. That overcomes a lot of the concentration issues of VTI and has been wildly successful!
VT, VO, VB for me
In my taxable accounts, I was DCA'ing VTI, but I've recently started putting my excess money in IJR (S&P 600). In my tax-deferred accounts, I'm running IWM (Russell 2000).
S&P 500 is fine, and I think it will do fine, but I think small caps are currently undervalued, have some tailwinds coming, and will have a big resurgence this year or next. When they've had their run, I'll probably go back to VTI, unless the AI thing ends up being a bubble and bursts; then I'd go to the Nasdaq after it deflates
The problem with thinking X or Y is under/overvalued, is that you're taking the opposite position to a lot of sophisticated institutions that do this for a living, that have more information than you do, and can trade the news in microseconds. That's why index funds are great, you benefit from their price discovery for (almost) free.
I think you are over investing. Just buy your VTI and chill
@@dirtydan6098 That's my default, but I will respond to opportunities
Hey Mr. Bagel question for you:
if i got to the store and ask for "two everything bagels with cream cheese, and another but plain" are they giving me 2 et w/cc and a plain with cream cheese, or 2 et cc and a plain everything bagel?
thanks
I LOVE you guys!
amazing video