Brilliant breakdown on the cap-weighted paradox! The stat about 74 stocks beating NVIDIA yet it still drives the most return really exposes the illusion of diversificaton in modern index investing. I've seen too many investors assume they're well-protected just beacuse they hold 'the whole S&P', when in reality they're loaded up on 40-ish names. The feedback loop from passive flows is kinda scary since it just keeps inflating the megacaps whether fundamentals justify it or not.
Thanks so much for your comment. This passive flow vs over valuation situation is a strange dynamic that will resolve itself eventually. Hopefully in a not so destructive way.
As I like to say, “diversification” is not risk-management.
The NVDA section is a good reality check on how diversification has become in a cap‑weighted world. I still prefer that over a price-weighted cap, though. But yes, the fact that 74 S&P names outperformed it last year, yet the company still drove more of the index’s return than any other? It really makes you see how much of the market story is about the size of a few companies rather than stock‑picking. And that's considering an index with only 500 names.
Thank you for your comment. It’s a strange world we live in these days, where benchmark components drive returns but expose investors to more risk than they understand and appreciate.
Brilliant breakdown on the cap-weighted paradox! The stat about 74 stocks beating NVIDIA yet it still drives the most return really exposes the illusion of diversificaton in modern index investing. I've seen too many investors assume they're well-protected just beacuse they hold 'the whole S&P', when in reality they're loaded up on 40-ish names. The feedback loop from passive flows is kinda scary since it just keeps inflating the megacaps whether fundamentals justify it or not.
Thanks so much for your comment. This passive flow vs over valuation situation is a strange dynamic that will resolve itself eventually. Hopefully in a not so destructive way.
As I like to say, “diversification” is not risk-management.
The NVDA section is a good reality check on how diversification has become in a cap‑weighted world. I still prefer that over a price-weighted cap, though. But yes, the fact that 74 S&P names outperformed it last year, yet the company still drove more of the index’s return than any other? It really makes you see how much of the market story is about the size of a few companies rather than stock‑picking. And that's considering an index with only 500 names.
Thank you for your comment. It’s a strange world we live in these days, where benchmark components drive returns but expose investors to more risk than they understand and appreciate.