For those worried about concentration in indexes
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talexuser
Posts: 3,499 Forumite
I assumed the US indexes were maybe toppy and maybe risky for a tech fall because of concentration and lack of diversification but this surprised me:
https://www.trustnet.com/news/13412104/the-uk-market-is-more-concentrated-than-the-us
https://www.trustnet.com/news/13412104/the-uk-market-is-more-concentrated-than-the-us
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So if we were worried about the concentration in the FTSE100 the answer is.. yes, it's been like this for a while?
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Naturally an index compromising of 100 stocks is going to be more concentrated than an index of 500 stocks."If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” Warren Buffett
Save £12k in 2021 - #027 £15,268 (76%)2 -
The main problem with the FTSE 100 is not in my view the concentration into a small number of companies but rather the inbalance at the sector level. Using the morning star sector classification Tech at 0.88% is the smallest sector on the index. The largest is Financial Services at 17%.
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george4064 said:Naturally an index compromising of 100 stocks is going to be more concentrated than an index of 500 stocks.
A mathematician might be able to propose a decent measure of concentration that takes the number of stocks into account, but it wouldn't be just "top 10".
Using figures from here, which seem to be yesterday's closing prices, the top 10 of the S&P 500 are 49.1% of the top 100.0 -
The SP500 concentration in the top 10 stocks fell from 1950 (when it was 50% in the top 10!) to about 25% during the last 40 years. From 1950 to about 1957 the US market returned almost 20%/year. Being concentrated in a few big stocks didn't do investors obvious harm. On the other hand, the fund manager trustnet quotes as the UK market being too concentrated has underperformed his benchmark, with greater volatility over the last 5 years. It's a puff piece for several funds mentioned. If you're trying to get market returns, you invest to reflect the market, it's that simple. If you want better returns it's not easy.
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