The US stock market is more concentrated than it has been in decades, largely due to large technology firms. However, historical evidence, empirical analysis, and theory show that higher concentration does not increase risk or justify portfolio rebalancing.
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Abstract
Many investors believe that the US stock market is riskier than it has been historically because a large fraction of its capitalization is concentrated in a few large technology companies. Some investors, therefore, conclude that they should rebalance their portfolios toward safer assets. The authors present clear evidence that the US stock market has indeed become more concentrated. However, they present practical and conceptual arguments along with persuasive empirical evidence that challenges the notion that investors should act to offset concentration.
KEY TAKEAWAYS
- Conventional wisdom holds that the stock market becomes riskier if a small number of companies grows to become a large fraction of the market’s total capitalization.
- The US stock market has become increasingly concentrated in a small number of technology companies in recent years as the AI revolution has channeled investment to these companies.
- However, both intuition and theory, supported by persuasive empirical evidence, belie the conventional wisdom that concentration begets risk. The US stock market has not become riskier as it has become more concentrated.