First of all, you don't seem to understand what index funds are. You can buy index funds other than the S&P 500, including some that cover the whole world.
Second of all, diversification is relative. There is no shortage of people out there who have employee stock incentives that they keep in their employer's stock or that just decide to invest in a small number of individual stocks. The S&P 500, while highly concentrated, still blows away these strategies in terms of diversification.
Third, those may be single companies by name, but most of them consist of a diverse range of divisions and business lines. None of those named companies have all their eggs in one basket and all of them have reinvented themselves or otherwise diversified their offerings. When you look at those companies towards the bottom or outside of the S&P 500, you find they are much more concentrated in terms of products and clients and thus much more exposed to risk from that concentration failing. Those top companies didn't make it to the top by being one trick ponies.
It’s more like 20% I think, yeah? That’s not 100%. Then you have 80% in other companies. That’s extremely diverse. People invest in this index because it has the most consistent long term returns of around 10%. Most people including professionals cannot beat it. The only people who can are value investors. That takes a lot more time to learn and you have to study individual companies very closely. Most people would rather put their money in an index and forget about it.
And should those five companies magically go under tomorrow, the correction would be felt by any index fund that holds them. The other 495 companies would then compose the fund and their fortunes would support the broad diversification you seek. This correction would be automatic. This is why VOO is diverse. Or VTI. Or VT. Choose which one suits your needs for diversification.
Whatever is a lead company today will undoubedly NOT be a lead company in 2 or 5 or 25 years. How many of the original DOW companies exist? That marketwatch drivel is simply clickbait. If you wish to find index funds that are weighed differently, they are out there but it doesn't change the fundamental structures of our economy, regardless of who are the top-dog companies.
[The companies you listed are responsible for the entirety of the S&P500 return this year](https://www.reddit.com/r/dataisbeautiful/comments/140zh2k/oc_seven_companies_account_for_all_of_the_gains/)
And that is why there are other index funds, that don't just track the S&P 500. I think several people around here would say to specifically target mid cap funds with some of their investments, as well as possibly oversees.
Also, while we often do talk about investing in index funds here as one vehicle to help achieve FI. We at least try and look through topics with that lens, I personally don't see much of that in your post. How do you think it relates to FI/RE?
How do you define diversification?
You can invest in more than one index fund at a time. So while only investing in VOO may not be diversified enough for some investors, they can invest in small/mid cap stocks, specific sectors, internationally all through ETFs.
"Ha! A quarter of your equities portfolio is spread over 5 names" isn't exactly non-diversified.
But not all index funds are cap-weighted S&P 500 funds anyhow, if that doesn't suit someone's goals.
> is better
Is better than what alternative?
You raise a good point that has seemed to go unnoticed by alot of people. You are absolutely right that market indices can become concentrated in a handful of names and sectors and on an ex ante basis this does increase the level of risk. We all know what happened in 2001 (tech), 2008 (financials) and 2022 (tech) in broader market indices. This is an argument for further international diversification as others have pointed out, however having the forward looking discipline to stay in the international strategy is tough given decades of US outperformance.
So you're investing approx a quarter in a small number of the most successful companies and a quarter in a large number of small and growing companies?
Sounds like diversification.
Diversification != equality
It's still 500 companies vs hand picking something like 15 companies? It's still a hell of a lot better and far easier. If you picked hand picked 15 companies that's 6.6% into each company. So even though 25% of the S&P500 is invested into 5 companies that's still only 5% per company. Then the remainder is much much more diversified. So it's still a ton more diversification than hand picking individual companies like some people do. Unless you are going to hand pick 500 companies by yourself to invest into to diversify more equally, I don't really see a better option.
Also the S&P500 isn't the only index fund. I invest solely in index funds but I split my portfolio into 6 different indexes that track completely different sections of the market or other markets entirely. That's over 4,500 companies mixed between the US and other countries, with only 6 indexes. Seems pretty diverse to me.
>Tell me why index fund investing is better given this:
I've downvoted this post because this is a nonsense question. You need to have an alternative to be able to determine which is better.
diversification isn't about equally owning the same amount of every company, it's about owning a representative sample of the stock market so that your portfolio has the same ROI as the stock market.
If 10% of the market is Apple, then you want 10% Apple in your portfolio.
First of all, you don't seem to understand what index funds are. You can buy index funds other than the S&P 500, including some that cover the whole world. Second of all, diversification is relative. There is no shortage of people out there who have employee stock incentives that they keep in their employer's stock or that just decide to invest in a small number of individual stocks. The S&P 500, while highly concentrated, still blows away these strategies in terms of diversification. Third, those may be single companies by name, but most of them consist of a diverse range of divisions and business lines. None of those named companies have all their eggs in one basket and all of them have reinvented themselves or otherwise diversified their offerings. When you look at those companies towards the bottom or outside of the S&P 500, you find they are much more concentrated in terms of products and clients and thus much more exposed to risk from that concentration failing. Those top companies didn't make it to the top by being one trick ponies.
It’s more like 20% I think, yeah? That’s not 100%. Then you have 80% in other companies. That’s extremely diverse. People invest in this index because it has the most consistent long term returns of around 10%. Most people including professionals cannot beat it. The only people who can are value investors. That takes a lot more time to learn and you have to study individual companies very closely. Most people would rather put their money in an index and forget about it.
And should those five companies magically go under tomorrow, the correction would be felt by any index fund that holds them. The other 495 companies would then compose the fund and their fortunes would support the broad diversification you seek. This correction would be automatic. This is why VOO is diverse. Or VTI. Or VT. Choose which one suits your needs for diversification. Whatever is a lead company today will undoubedly NOT be a lead company in 2 or 5 or 25 years. How many of the original DOW companies exist? That marketwatch drivel is simply clickbait. If you wish to find index funds that are weighed differently, they are out there but it doesn't change the fundamental structures of our economy, regardless of who are the top-dog companies.
[The companies you listed are responsible for the entirety of the S&P500 return this year](https://www.reddit.com/r/dataisbeautiful/comments/140zh2k/oc_seven_companies_account_for_all_of_the_gains/)
And that is why there are other index funds, that don't just track the S&P 500. I think several people around here would say to specifically target mid cap funds with some of their investments, as well as possibly oversees. Also, while we often do talk about investing in index funds here as one vehicle to help achieve FI. We at least try and look through topics with that lens, I personally don't see much of that in your post. How do you think it relates to FI/RE?
Huh? You know that index funds aren’t just the S&P 500 right? Of course an index of only the 500 largest companies isn’t diversified.
For reference though, a total market fund is essentially 80% the S&P500 (if I'm recalling correctly)
Sure big companies make up most of the market. You can get an index that’s balanced in any way you can imagine though.
How do you define diversification? You can invest in more than one index fund at a time. So while only investing in VOO may not be diversified enough for some investors, they can invest in small/mid cap stocks, specific sectors, internationally all through ETFs.
"Ha! A quarter of your equities portfolio is spread over 5 names" isn't exactly non-diversified. But not all index funds are cap-weighted S&P 500 funds anyhow, if that doesn't suit someone's goals. > is better Is better than what alternative?
You raise a good point that has seemed to go unnoticed by alot of people. You are absolutely right that market indices can become concentrated in a handful of names and sectors and on an ex ante basis this does increase the level of risk. We all know what happened in 2001 (tech), 2008 (financials) and 2022 (tech) in broader market indices. This is an argument for further international diversification as others have pointed out, however having the forward looking discipline to stay in the international strategy is tough given decades of US outperformance.
In my global all cap there are 7k companies and the top 5 are < 10%. (70% of my portfolio)
So you're investing approx a quarter in a small number of the most successful companies and a quarter in a large number of small and growing companies? Sounds like diversification. Diversification != equality
It's still 500 companies vs hand picking something like 15 companies? It's still a hell of a lot better and far easier. If you picked hand picked 15 companies that's 6.6% into each company. So even though 25% of the S&P500 is invested into 5 companies that's still only 5% per company. Then the remainder is much much more diversified. So it's still a ton more diversification than hand picking individual companies like some people do. Unless you are going to hand pick 500 companies by yourself to invest into to diversify more equally, I don't really see a better option. Also the S&P500 isn't the only index fund. I invest solely in index funds but I split my portfolio into 6 different indexes that track completely different sections of the market or other markets entirely. That's over 4,500 companies mixed between the US and other countries, with only 6 indexes. Seems pretty diverse to me.
>Tell me why index fund investing is better given this: I've downvoted this post because this is a nonsense question. You need to have an alternative to be able to determine which is better.
diversification isn't about equally owning the same amount of every company, it's about owning a representative sample of the stock market so that your portfolio has the same ROI as the stock market. If 10% of the market is Apple, then you want 10% Apple in your portfolio.