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It is worth understanding that the European stock market, bar the UK and possibly Sweden, isn't like the US. Most companies finance themselves through banks. Wh

It is worth understanding that the European stock market, bar the UK and possibly Sweden, isn't like the US. Most companies finance themselves through banks. Whilst Europe as an economic unit is larger than the US, capital markets are still basically non-existent (bar the efforts of the ECB to throw cash at anyone who raises money from capital markets). Also, the rise of tech stocks is significant not only relative to other economies but relative to other large stocks in the US. The S&P500 is more concentrated than it has ever been and is pretty close to what you see in emerging markets (where the top 5 or so stocks make up a huge chunk of the total index).

smabie 6y ago
Yeah, a lot of people don't realize how market cap weighted actually gets you a not very diversified portfolio. For example, if you hold the S&P 500, about 8% of that is Apple, 6% is Amazon, 6% Microsoft, and 4% Google. So 25% of your capital is going to 4 names, all in the same sector. Meanwhile, the smallest holdings will be under 1%. Though market cap weighted is good for avoiding trading fees (you don't have to rebalance when the price of a stock changes), it's bad for investors. Not only do you miss out on some diversification, you end up with undue exposure to only a few sectors and you miss out on Fama and French's size factor by only investing in large companies.
- hogFeast 6y ago
  The size factor has lost money pretty consistently. It is also a very suspicious factor generally because there are very obvious non-risk factor explanations (i.e. liquidity). Just generally, FF do very irrational things with their models (i.e. not including momentum)...they are credible but the way they do things is obviously not quite correct (Fama spent decades saying this kind of thing was totally impossible). Market cap weighting is fine, if you actually end up with something reasonable...which you don't anymore. I wouldn't really recommend equal weighting either...so...

smabie 6y ago

Yeah, a lot of people don't realize how market cap weighted actually gets you a not very diversified portfolio. For example, if you hold the S&P 500, about 8% of that is Apple, 6% is Amazon, 6% Microsoft, and 4% Google. So 25% of your capital is going to 4 names, all in the same sector. Meanwhile, the smallest holdings will be under 1%. Though market cap weighted is good for avoiding trading fees (you don't have to rebalance when the price of a stock changes), it's bad for investors. Not only do you miss out on some diversification, you end up with undue exposure to only a few sectors and you miss out on Fama and French's size factor by only investing in large companies.

hogFeast 6y ago
The size factor has lost money pretty consistently. It is also a very suspicious factor generally because there are very obvious non-risk factor explanations (i.e. liquidity). Just generally, FF do very irrational things with their models (i.e. not including momentum)...they are credible but the way they do things is obviously not quite correct (Fama spent decades saying this kind of thing was totally impossible). Market cap weighting is fine, if you actually end up with something reasonable...which you don't anymore. I wouldn't really recommend equal weighting either...so...