Once S&P 500 return is decomposed into factors 2024 really stands out.
“… What is particularly interesting about 2024 is how much of the S&P 500 return came from non-systematic (i.e., idiosyncratic) returns, driven by the significant appreciation of the “Magnificent Seven” (Mag-7), which now account for 35% of the S&P 500. Idiosyncratic returns are company specific and by definition should be uncorrelated and random.“
“In fact, idiosyncratic return has never contributed as significantly to the overall S&P 500 return as it has recently. Over the trailing 24 month period, idiosyncratic returns have accounted for 21% of the 51% return of the S&P 500.“
We all know indices are concentrated right now, more than ever. Just how bad is it?
“The startling conclusion is that, despite the Russell 1000 nominally providing exposure to its namesake number of stocks, the index affords an effective diversification of only 59 stocks.“
“Not only does market-cap weighting induce substantial single-stock risk, but the diversification provided by this foundational asset class has evaporated by 70% over the past decade.“
Equal weight, as the article argues, is not the solution here, as it “suffers from significant operational costs, underperformance, questionable assumptions, and skewed risk bets.“
“Antti Petajisto analyzed the return distribution of all US stocks in the CRSP database going back to 1926. Below is the distribution of returns for different investment horizons. Note that the distribution gets more and more skewed to the left as investment horizons increase and that the left-hand side of the distribution is not zero, but a total loss of investment (-100% return).“
