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correlation between all stocks in the S&P 500 is so high that removing big tech makes little difference. Also, a major part of the problem in my view is the bl
by smabie 6y ago
correlation between all stocks in the S&P 500 is so high that removing big tech makes little difference.
Also, a major part of the problem in my view is the blind indexing of equities that most investors use for the bulk of their portfolio. Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest market cap, resulting in those stocks going up even more.
- ac29 6y ago> Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest market cap, resulting in those stocks going up even more New money is allocated exactly proportionally to a stock's market cap in a cap-weighted index fund, by definition. New money into such funds can't disproportionally increase the price of one stock in the index versus another.
- smabie 6y agoSorry, I phrased that incorrectly/poorly. What I meant to say is that market cap weighting allocates more money to stocks that have a higher market cap (and the stocks got that way by going up in the past), pushing up the price even more. This wouldn't be true if all shares of a company were all trading at the same time, but that's not the case. The number of available shares is more constrained than the total free floating market cap would suggest.