The Risks Of Sticking With The Biggest Stocks

The Risks Of Sticking With The Biggest Stocks

over 3 years ago2 mins

Mentioned in story

Much digital ink has been spilled this year about a handful of huge tech firms’ growing domination of the US stock market. But more than a century of data shows the market is actually less concentrated than it has been historically – while suggesting that investors should strongly consider avoiding today’s top guns 🚷 

What does this mean?

Stocks’ present state of play has strong echoes of the late 90s, when Microsoft, Cisco, and General Electric bestrode the S&P 500 like colossi – or indeed the late 60s, when IBM and AT&T hogged the limelight. In fact, for most of its history the US stock market has been more top-heavy than it is right now.

Weight of largest stocks in the S&P 500
(Source: S&P Global, CRSP)

It’s true that the S&P 500 would be in the red this year without the contribution of Apple, Microsoft, Facebook, Amazon and Google parent Alphabet. These companies, all of which unveil quarterly earnings this week, loom so large in the modern stock market – and indeed the modern economy – that it’s hard to imagine anything but a rosy future for their share prices. 

But history suggests that these market titans’ best days may already be behind them. In a report out Monday, index and ratings provider S&P Global charted the performance of stocks in the years after they became one of America’s 10 largest firms. Five years later, their performance lagged the wider market by an annualized 1.1% – stretching to an even less impressive 1.5% after 10 years. Their greatest price gains all came before the companies hit the top 10.

Performance of the largest US stocks
(Source: S&P Global, CRSP)

Why should I care?

Investing in an exchange-traded fund (ETF) tracking the entire S&P 500 index ensures you own not only a slice of today’s top hot dogs, but also a stake in tomorrow’s winners – the smaller (albeit still large) companies with the potential to become the next Facebooks and Amazons. An “equal-weight” ETF, meanwhile, would get you even greater exposure to these smaller stocks. Either way, if you shun the rest of the market and just invest in the biggest names, history suggests you stand to lose out in the long run 👵

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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