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Concentration Risk

Concentration Risk

| August 03, 2020
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Apple, Microsoft, Amazon, Google and Facebook have led the charge higher in the stock market since the late March lows.  The average return for these five stocks so far this year has been a gain of more than 30%, while the broader S&P 500 index is just marginally positive—up 1.2% through July 31st.  So while most other areas of the market have remained largely static, the total market value of these stocks has dramatically increased, which has made them an increasingly large piece of indexes like the S&P 500.  As research from LPL Financial shows, the combined weight of the top five stocks in the S&P 500 has increased to its highest level ever, at nearly 22%, far higher even than during the bubble of 1999.  This is called “concentration risk”, and is real although LPL states that it believes that the recent gains from those stocks have been justified by their fundamentals and their utility during the ongoing pandemic “stay-at-home” trend. (Chart from LPL Financial)

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