The Stock Market Is *VERY* Concentrated

One of the important facts about the stock market that I try to stress to new investors is just how big the mega-cap stocks are. These are gigantic companies, even compared with other fairly large stocks.

Apple has a market value in excess of $2 trillion. Google, Microsoft and Amazon are in the $1 trillion club.

The total market value of the S&P 500 is about $32 trillion. That means that those four stocks make up about 20% of the index.

Here’s a good chart that shows how concentrated the stock market is. This chart shows the 50 largest stocks in the S&P 500 (red line) along with the S&P 500 (blue line). In other words, the other 90% of the index adds a little diversification, but not much.

A few years ago, I tried to show how you could build a decent index fund with just eight stocks. (Mimicking the index is the easy part, but it’s a classic case of fat tails. That means that one big outlier can completely wreck your index tracking.)

One of the broad-based indexes is the Russell 3000. They further sub divide that into the 1,000 largest for the Russell 1000. The other 2,000 stocks make up the Russell 2000 which is often a proxy for the small-cap market. My point is that companies in the Russell 2000 are still pretty big. Recently, Apple’s market value surpassed the market value of the entire Russell 2000.

You can build a portfolio with only a few stocks that closely follows the indexes. You can also build a portfolio with hundreds of stocks that moves entirely differently than the market.

Posted by on March 3rd, 2021 at 2:35 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.