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.
