Diversification has been a bust, once again, so far this year. All you have to do is look at the following chart below (from Jim Bianco Research) to see the proof!
As shown, the seven large tech stocks (i.e., Facebook, Apple, Amazon, Netflix, Google, Microsoft and Nvidia) on a cap-weighted basis have accounted for ALL of the positive returns for the S&P 500 so far this year, with the 492 Other stocks actually netting out to a slightly negative return! Another way of saying this is that the equal-weighted return of the S&P 500 actually has UNDERPERFORMED the cap-weighted return by about 600 basis points! Moreover, the cap-weighted S&P 500 actually has been a bit less risky on a year-to-date basis.
So, are we re-writing the book on diversification? Should we all just continue to invest simply in the top S&P 500 stocks and forget about other equity markets and bonds? Not so fast!
Traditional long-term strategic investing will always include a component of large cap U.S. equities as a core holding. Over a longer time horizon we can always expect to see some things go in and out of favor. For example, though the 2023 YTD experience shown above of the equal- vs. cap-weighted S&P 500 has been extremely weak, if we simply look back to the experience in calendar year 2022 we can see in the chart below that equal-weighted (RSP) actually OUTPERFORMED cap-weighted (IVV) by 660 basis points last year!
So, please don’t be unduly influenced by the recency effect and think that today’s experience will persist and become the new normal. No one can outguess the market and pick the winners all the time. Though we are all happy that Amazon is up +31% this YTD, we should not forget that it was down -49% in 2022!