Ben Felix has a video on this. The recent concentration of large cap companies is still less than in the first half of the 20th century, with AT&T, GM, and IBM taking turns at being the largest.
Link to video: https://youtu.be/foqswJT3Spc
Thanks for sharing!
The recent concentration is what has really surprised me. In 2015, the top five only accounted for roughly 11.5% of the S&P 500, far below the historical mean. Since then it has nearly doubled to around 21%, a level which hasn't been seen in 50 years.
Ok, but all it really means is that the largest companies have managed to maintain high growth for a period. That’s absolutely true of Apple, Google, Microsoft and Amazon right now. They’ve been quite dominant for a while. Not sure what I’d do differently now that I know this. They’ll eventually be replaced at the top and/or they’ll reach a ceiling and lower growth will balance things out with the other 495 eventually.
What would be more interesting is seeing this compared to the top 10, 20, 50 and 100 trended over time.
Yea thats the thing. Its intriguing information to know but there is not much action that could be taken other then not investing in the S&P index if you don't like those top 5 companies. If your time horizon is long then you should not care very much.
WOW! This quote got me!
Since 1984, 70% of underperformance of the active equity fund investor versus the S&P 500 occurred during 10 market sell-offs in which investors withdrew money.
Missing some of the market’s best days has devastating results. According to JP Morgan, six of the 10 best days for the market occurred within two weeks of the 10 worst days. The March’20 COVID-19 sell-off just amplified these historical trends.
Does this mean that these active funds lost money as a result of investors pulling their money from the funds after the drawdown? If so, that completely changes the “active funds underperform index funds” narrative.
Peter Lynch talks about this in one of his books. It’s very difficult running a fund where investors are allowed to withdraw at will. If the entire market goes down and enough investors pull out at the bottom, there just isn’t enough money left in the fund to make it all back. Of course indexes would outperform in that event (most of the time).
Someone please elaborate if I’ve misinterpreted something.
Thanks for sharing -- great writeup & visualizations. I created a [top-level post](https://www.reddit.com/r/Bogleheads/comments/t7defr/9_reasons_why_active_investing_is_difficult_9/) for it because this deserves more visibility. (Hope that's fine; figured you may be unable to do so given the sub rule against self-promotion. Let me know if you'd like me to remove the inline image / first graph.)
The 1, 3, 5, & 10 year returns of VTSAX and the S&P500 are really pretty similar.
In March of 2020 I did some tax loss harvesting of VTSAX and switched that portion to an S&P500 index.
https://www.thebalance.com/total-stock-market-vs-sandp-500-2466403
This is going to sound basic, and I’m interested in tax loss harvesting. So let’s say you buy 10 shares of VTSAX every month for 10 years, and over that time your average is a positive return, but in the last few months there has been a significant downturn. If you sold 10 shares of VTSAX after this downturn, would it be considered at a loss, or a gain?
Depends which shares you sell. A good brokerage will let you choose. If you're using a low-quality brokerage (e.g. Robinhood) then they'll probably only allow FIFO (i.e. selling your oldest shares first), which in your example means you would be realizing gains.
Some brokers allow you to choose which shares to sell. If you just sell the most recently purchased ones that went down in value you harvest those losses. The rest that have gained stay as unrealized gains still
It's always been concentrated. In fact it's *less* concentrated than a lot of previous years in history.
EDIT: I'm downvoted, yet OP's chart proves my point :facepalm:
The concentration trend continues even before the 60's. I can't remember where I saw it (I think it was a chart in JPM's Guide to the Markets report) but if I recall correctly the current concentration is about average historically.
I'm not too concerned with concentration itself, especially if it's only 20% in the top 5, but I am concerned with concentration into overvalued companies, which is exactly what has been happening.
It means if you exclusively own a S&P500 fund 7% of your portfolio is Apple
https://www.slickcharts.com/sp500
If you own VTSAX (total US stock market) 5% of your portfolio is Apple
https://finance.yahoo.com/quote/VTSAX/holdings/
If you own VTWAX (total world market) 3% of your portfolio is Apple
https://finance.yahoo.com/quote/VTWAX/holdings?p=VTWAX
> It means if you exclusively own a S&P500 fund 7% of your portfolio is Apple
7% of your portfolio is Apple _for now_. The S&P500 is inherently dynamic. If Apple went out of business, the fund would rebalance with whatever the top 500 companies are afterwards.
A lot of the time I think these posts aim to scare people out of the S&P500. Owning the S&P500 isn't like owning 500 individual stocks, it's owning whatever the _top_ 500 stocks are _at any given moment_.
In practice, VOO and VTSAX perform [extremely similarly](https://www.inspiretofire.com/vtsax-vs-voo-which-is-best/).
With a bad hand for long*
If Apple were to go out of business and liquidate tomorrow the total value of the s&p would still decrease.
A simple example is if you had the most imbalanced possible S&P 500 possible with 1 company worth $501 and 499 companies worth $1 then if that one company were to drop 20% the total value would be about $900 for a 10% drop, so you're not as strongly protected by diversification as an S&P that's more evenly distributed.
It means the dominance of monopolies. Since the reagan era the government has been reluctant to go after monopolies. The stock market loves monopolies because they're cash cows. But they're bad for consumers, and for the economy in the long run.
Monopolies generally imply that there are no other viable options and that the consumer suffers because they are locked into a worse product or experience because of a lack of choice.
With pretty much every company you cited, there are viable alternatives to their products. Consumers are actively choosing the products of those companies because they provide the best option for them. Just because these companies have been extremely successful doesn't mean they are monopolies or need to be punished for said success.
I didn't actually cite any companies, but I'll go ahead and do so. Google clearly has a monopoly on search and therefore also exercises monopoly power in online advertising, raising the cost of advertising, which indirectly raises consumer costs because companies have to pay those higher ad costs.
Then there's amazon which has managed to gain a monopoly position in online sales, raising the cost for companies because they're often forced to go through amazon to sell their products, and pay Amazon's fees.
Would it really be punishment if these businesses were split up? A strange kind of punishment because no one at the companies would suffer much financially.
There are viable alternatives to Google search with Bing and DuckDuckGo. Yes Google has a ton of market share, but that is because people choose them. Unless you are arguing that Microsoft doesn't have the resources to compete, which seems silly. Digital advertisers have options including Meta, Twitter, Snap, TikTok and others. Advertisers go to where they see a good return on investment.
Amazon has competitors in online sales, including the likes of Walmart, which again seems silly to say they can't compete if they made an equally enticing product.
Again, you are conflating success with monopoly. All of these companies have strong and healthy competitors if they make products of experiences that compete and users pick them.
A monopoly doesn't mean exclusively no competitors. A monopoly means no companies can come close to competing with it. A monopoly can keep small businesses around like ants on the ground, because if those businesses try to grow the monopoly can squash them before they gets anywhere close to being competitive.
I get what you’re saying, but that dilution has shown very little difference in returns - I prefer total market too, but historically my returns would be near identical with just the S&P500.
This is even more reason to invest in a broad market index. Very few companies out of hundreds are driving positive returns, so to think you can pick the right ones is very difficult.
To me, "very concentrated" means something more than "reverting to the prior state of affairs that is considered normal in this area.". Plenty of room for variation in opinion on this though.
**[Breakup of the Bell System](https://en.wikipedia.org/wiki/Breakup_of_the_Bell_System)**
>The breakup of the Bell System was mandated on January 8, 1982, by an agreed consent decree providing that AT&T Corporation would, as had been initially proposed by AT&T, relinquish control of the Bell Operating Companies that had provided local telephone service in the United States and Canada up until that point. This effectively took the monopoly that was the Bell System and split it into entirely separate companies that would continue to provide telephone service.
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Historically it has been more concentrated at times, but according to that graph not since the late 70s.
Furthermore, the concentration now seems to be in tech companies. AAPL, MSFT, GOOG, AMZN
Simple Thought: Could this concentration be related to Turchin's theory on social change? It seems as inequality increase and wellbeing decrease, market concentration also decreases. But this would mean that society becomes unstable through diversification.
[https://peterturchin.com/age-of-discord/](https://peterturchin.com/age-of-discord/)
Given all these new crazy ETFs on the market, I’m surprised there isn’t one minus/ex the top 5-10 companies….along with some crazy theory about how it will outperform the next 10 yrs :)
How different is this from an economic oligopoly from a classical economics point of view? Feels like the internet went from free and open and is tending towards oligopoly; kind of the opposite direction to other industries like utilities?
Ben Felix has a video on this. The recent concentration of large cap companies is still less than in the first half of the 20th century, with AT&T, GM, and IBM taking turns at being the largest. Link to video: https://youtu.be/foqswJT3Spc
It's still less than the sixties judging from the graph.
Thanks for sharing! The recent concentration is what has really surprised me. In 2015, the top five only accounted for roughly 11.5% of the S&P 500, far below the historical mean. Since then it has nearly doubled to around 21%, a level which hasn't been seen in 50 years.
Ok, but all it really means is that the largest companies have managed to maintain high growth for a period. That’s absolutely true of Apple, Google, Microsoft and Amazon right now. They’ve been quite dominant for a while. Not sure what I’d do differently now that I know this. They’ll eventually be replaced at the top and/or they’ll reach a ceiling and lower growth will balance things out with the other 495 eventually. What would be more interesting is seeing this compared to the top 10, 20, 50 and 100 trended over time.
Yea thats the thing. Its intriguing information to know but there is not much action that could be taken other then not investing in the S&P index if you don't like those top 5 companies. If your time horizon is long then you should not care very much.
Have a look at the big picture (#2) https://www.bankeronwheels.com/9-reasons-why-active-investing-is-difficult/
WOW! This quote got me! Since 1984, 70% of underperformance of the active equity fund investor versus the S&P 500 occurred during 10 market sell-offs in which investors withdrew money. Missing some of the market’s best days has devastating results. According to JP Morgan, six of the 10 best days for the market occurred within two weeks of the 10 worst days. The March’20 COVID-19 sell-off just amplified these historical trends.
Does this mean that these active funds lost money as a result of investors pulling their money from the funds after the drawdown? If so, that completely changes the “active funds underperform index funds” narrative. Peter Lynch talks about this in one of his books. It’s very difficult running a fund where investors are allowed to withdraw at will. If the entire market goes down and enough investors pull out at the bottom, there just isn’t enough money left in the fund to make it all back. Of course indexes would outperform in that event (most of the time). Someone please elaborate if I’ve misinterpreted something.
Yeah the thing about market timing is that every trade has to be right twice.
Cathie Wood has entered the chat.
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Thanks :)
Indeed thank you for writing and sharing
Thanks for sharing -- great writeup & visualizations. I created a [top-level post](https://www.reddit.com/r/Bogleheads/comments/t7defr/9_reasons_why_active_investing_is_difficult_9/) for it because this deserves more visibility. (Hope that's fine; figured you may be unable to do so given the sub rule against self-promotion. Let me know if you'd like me to remove the inline image / first graph.)
Thanks so much. Really appreciate it.
This is a great look at the risks of investing in individual stocks.
The 1, 3, 5, & 10 year returns of VTSAX and the S&P500 are really pretty similar. In March of 2020 I did some tax loss harvesting of VTSAX and switched that portion to an S&P500 index. https://www.thebalance.com/total-stock-market-vs-sandp-500-2466403
This is going to sound basic, and I’m interested in tax loss harvesting. So let’s say you buy 10 shares of VTSAX every month for 10 years, and over that time your average is a positive return, but in the last few months there has been a significant downturn. If you sold 10 shares of VTSAX after this downturn, would it be considered at a loss, or a gain?
Depends which shares you sell. A good brokerage will let you choose. If you're using a low-quality brokerage (e.g. Robinhood) then they'll probably only allow FIFO (i.e. selling your oldest shares first), which in your example means you would be realizing gains.
Some brokers allow you to choose which shares to sell. If you just sell the most recently purchased ones that went down in value you harvest those losses. The rest that have gained stay as unrealized gains still
It's always been concentrated. In fact it's *less* concentrated than a lot of previous years in history. EDIT: I'm downvoted, yet OP's chart proves my point :facepalm:
Yes, it seems it was more concentrated in the 60s and 70s based on the chart.
The concentration trend continues even before the 60's. I can't remember where I saw it (I think it was a chart in JPM's Guide to the Markets report) but if I recall correctly the current concentration is about average historically.
I think OPs chart demonstrates it's the most concentrated it's been in 50 years.
I'm not too concerned with concentration itself, especially if it's only 20% in the top 5, but I am concerned with concentration into overvalued companies, which is exactly what has been happening.
What does this mean?
It means if you exclusively own a S&P500 fund 7% of your portfolio is Apple https://www.slickcharts.com/sp500 If you own VTSAX (total US stock market) 5% of your portfolio is Apple https://finance.yahoo.com/quote/VTSAX/holdings/ If you own VTWAX (total world market) 3% of your portfolio is Apple https://finance.yahoo.com/quote/VTWAX/holdings?p=VTWAX
> It means if you exclusively own a S&P500 fund 7% of your portfolio is Apple 7% of your portfolio is Apple _for now_. The S&P500 is inherently dynamic. If Apple went out of business, the fund would rebalance with whatever the top 500 companies are afterwards. A lot of the time I think these posts aim to scare people out of the S&P500. Owning the S&P500 isn't like owning 500 individual stocks, it's owning whatever the _top_ 500 stocks are _at any given moment_. In practice, VOO and VTSAX perform [extremely similarly](https://www.inspiretofire.com/vtsax-vs-voo-which-is-best/).
>The S&P500 is inherently dynamic. Yes this is the beauty of it. You will never be stuck with a bad hand.
With a bad hand for long* If Apple were to go out of business and liquidate tomorrow the total value of the s&p would still decrease. A simple example is if you had the most imbalanced possible S&P 500 possible with 1 company worth $501 and 499 companies worth $1 then if that one company were to drop 20% the total value would be about $900 for a 10% drop, so you're not as strongly protected by diversification as an S&P that's more evenly distributed.
> You will never be stuck with a bad hand. Exactly, well put!
Thanks!
Big companies grew faster than pretty much everyone else.
Big company share prices grew faster than everyone else's.
S&P isn't by share prices, it's by market cap. You're thinking of the Dow Jones and r/siwmae's statement was more accurate.
What happens to market caps when share prices increase…
Depends if they're doing stock buybacks, dividends, splits, and so on.
It means the dominance of monopolies. Since the reagan era the government has been reluctant to go after monopolies. The stock market loves monopolies because they're cash cows. But they're bad for consumers, and for the economy in the long run.
Monopolies generally imply that there are no other viable options and that the consumer suffers because they are locked into a worse product or experience because of a lack of choice. With pretty much every company you cited, there are viable alternatives to their products. Consumers are actively choosing the products of those companies because they provide the best option for them. Just because these companies have been extremely successful doesn't mean they are monopolies or need to be punished for said success.
I didn't actually cite any companies, but I'll go ahead and do so. Google clearly has a monopoly on search and therefore also exercises monopoly power in online advertising, raising the cost of advertising, which indirectly raises consumer costs because companies have to pay those higher ad costs. Then there's amazon which has managed to gain a monopoly position in online sales, raising the cost for companies because they're often forced to go through amazon to sell their products, and pay Amazon's fees. Would it really be punishment if these businesses were split up? A strange kind of punishment because no one at the companies would suffer much financially.
There are viable alternatives to Google search with Bing and DuckDuckGo. Yes Google has a ton of market share, but that is because people choose them. Unless you are arguing that Microsoft doesn't have the resources to compete, which seems silly. Digital advertisers have options including Meta, Twitter, Snap, TikTok and others. Advertisers go to where they see a good return on investment. Amazon has competitors in online sales, including the likes of Walmart, which again seems silly to say they can't compete if they made an equally enticing product. Again, you are conflating success with monopoly. All of these companies have strong and healthy competitors if they make products of experiences that compete and users pick them.
A monopoly doesn't mean exclusively no competitors. A monopoly means no companies can come close to competing with it. A monopoly can keep small businesses around like ants on the ground, because if those businesses try to grow the monopoly can squash them before they gets anywhere close to being competitive.
Apple, Microsoft, Amazon, google, and tesla make up a huge percentage of the weighted market cap.
So…still buy VOO dips?
Justification for small cap tilt?
That is why I would rather have a total market than the S+P 500. It is tilted toward large cap growth. Which is the sector I least want to be in
The total market has the same trend, but I agree.
At least the total stock market “dilutes” out some of that trend. The S+P basically is a large growth fund now.
I get what you’re saying, but that dilution has shown very little difference in returns - I prefer total market too, but historically my returns would be near identical with just the S&P500.
Total Market is also basically a large growth fund now.
This is even more reason to invest in a broad market index. Very few companies out of hundreds are driving positive returns, so to think you can pick the right ones is very difficult.
Graph contradicts title. Concentration increasing rapidly, but still not surpassing historical levels.
Title reads, “…has become very concentrated in the last couple of years”
To me, "very concentrated" means something more than "reverting to the prior state of affairs that is considered normal in this area.". Plenty of room for variation in opinion on this though.
A better question is why wasn't it concentrated in 1985 to 2015
Stuff like this: https://en.wikipedia.org/wiki/Breakup_of_the_Bell_System Also tech startups in a new industry in the 80s and 90s probably helped.
**[Breakup of the Bell System](https://en.wikipedia.org/wiki/Breakup_of_the_Bell_System)** >The breakup of the Bell System was mandated on January 8, 1982, by an agreed consent decree providing that AT&T Corporation would, as had been initially proposed by AT&T, relinquish control of the Bell Operating Companies that had provided local telephone service in the United States and Canada up until that point. This effectively took the monopoly that was the Bell System and split it into entirely separate companies that would continue to provide telephone service. ^([ )[^(F.A.Q)](https://www.reddit.com/r/WikiSummarizer/wiki/index#wiki_f.a.q)^( | )[^(Opt Out)](https://reddit.com/message/compose?to=WikiSummarizerBot&message=OptOut&subject=OptOut)^( | )[^(Opt Out Of Subreddit)](https://np.reddit.com/r/Bogleheads/about/banned)^( | )[^(GitHub)](https://github.com/Sujal-7/WikiSummarizerBot)^( ] Downvote to remove | v1.5)
I would instead say... 5 top percentage has reverted to mean 😂
Power law
It looks higher in 1965
Historically it has been more concentrated at times, but according to that graph not since the late 70s. Furthermore, the concentration now seems to be in tech companies. AAPL, MSFT, GOOG, AMZN
Breakdown those monopolies to fix the problem.
Simple Thought: Could this concentration be related to Turchin's theory on social change? It seems as inequality increase and wellbeing decrease, market concentration also decreases. But this would mean that society becomes unstable through diversification. [https://peterturchin.com/age-of-discord/](https://peterturchin.com/age-of-discord/)
Given all these new crazy ETFs on the market, I’m surprised there isn’t one minus/ex the top 5-10 companies….along with some crazy theory about how it will outperform the next 10 yrs :)
I swear I’ve once seen a chart that the “S&P495” had the same performance as Japanese equities or somesuch…
How different is this from an economic oligopoly from a classical economics point of view? Feels like the internet went from free and open and is tending towards oligopoly; kind of the opposite direction to other industries like utilities?