A surprising fact about market concentration

 

A surprising fact about market concentration: it does NOT imply higher risk. 

In the past 25+ years, the largest stocks in the S&P 500 (just 8) had the same total market cap as the smallest 328. Super concentrated... 

However, despite being 40x more concentrated, the equal weighted 8-stock portfolio has had just about the same volatility as the 328-stock portfolio. And it has less negative skewness and less kurtosis. 

How is that possible? 

Large stocks have more intrinsic diversification and safety:

  - Geographic breadth
  - Product breadth
  - Large customer base
  - Better access to capital
  - More options to manage adversity
  - More governance scrutiny

These factors all reduce risk and counter the fact that large stocks are focused in tech and have exposure to a handful of key people/CEOs.