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Index Fund Concentration

Cullen,

I know you are a fan of market cap indexing for simplicity’s sake. Are you worried at all that the top 10 stocks make up 25% of the index? Doesn’t that sort of add risk if $25 of every $100 goes into Google, Apple, Facebook etc?

And are the top stocks there because they are the most successful or because they just have the most shares outstanding creating a huge market cap?

Thanks!

Jeffrey

Hi @jalanlong

I guess it depends on what else you have going on. The reason I like MC weight is primarily because I prefer a global asset allocation. So, if you're globally allocated then the tech concentration is a much smaller concern because you have foreign equity exposure that gives you what is essentially a value tilt compared to the domestic growth tilt.

Your bond tilt also mitigates the MC domestic weighting, but again, that depends on personal specifics.

So, long-story short, if you have a home bias then you have a domestic equity growth bias by virtue of the MC weight. This creates the need for even more diversification across the rest of your portfolio since the growth tilt in the domestic equity slice potentially turns your portfolio into a more volatile tech focused portfolio.

Hope that helps!

Cullen

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche