THIS IS WHAT INVESTORS ARE MISSING THIS YEAR
Cut to the chase: The entire performance of the stock market this year is due to a very small sampling of stocks; the top 10 biggest publicly traded domestic companies.
The last line in the graph below, highlighted in blue, illustrates that. If you include #11 on the list, Facebook, the difference becomes even more outsized.
The top 10 biggest company stocks, YTD, put in a mighty respectable 13.9% return. The other 490, even with Facebook, show a -5.8% return; a performance spread of 19.7%.
This tells us a few important things (below the graph):
1. No wonder most investors are dumbfounded as to why they're not doing as well as they think they should.
2. The largest stocks are now the focal point of intense performance chasing by active managers who are lagging their benchmark.
3. Over concentration in the top 10 has greater potential to decimate investors' portfolios down the road because diversification goes out the window (years 2000, 2001, 2002, 2008). 4 of the top 10 are tech related (Apple, Google, Microsoft, Amazon).
4. The benchmark skews performance toward the largest companies because the index is market cap (company size) weighted.
5. The strategy, if you can even call it that, of investing in the top 10 mega cap stocks is incredibly inconsistent, as is the the benchmark index itself (the SPREAD column glaringly points that out).
My conclusion: No strategy works in every single market cycle. The job of an active asset manager should be to A - bring greater consistency and risk management to portfolios, B - to adjust portfolios so they continue to match the evolving goal(s) of the portfolio owner, and C - to keep investors from running away from their investment plans during short term periods of increased volatility. Diversification is not supposed to help you beat a benchmark; it is supposed to keep you from getting crushed so you don't have to spend years just to get back to even.
Source: Value Walk - http://www.valuewalk.com/2015/11/whitney-tilson-the-10-largest-stocks-in-the-sp-500-are-up-13-9-chart/
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. This email is intended to reach only those in the following states: AZ, CA, CO, CT, FL, IL, IN, KS, KY,LA, MD, MT, NJ, NM, NY, PA, TX, VA, WA. If you are a resident of a state not included in this list, please reply email so I may add your state or please opt-out.
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