Often, the largest market cap stocks are in headlines a lot. Today, some of the largest stocks in the US include names such as Apple, Microsoft, Amazon, Google, and Berkshire Hathaway (just to name a few). Since we hear about these companies so often, should we own more of these stocks?
Yes and no.
The “Yes” part: Large cap stocks are an important part of your portfolio and virtually everyone should have an allocation that includes these stocks.
The “No” part: There is little evidence to suggest that over-weighting the largest stocks (in particular, the largest 10 stocks) will add to your long term return. In fact, the opposite is true. Since 1927, the largest 10 US stocks have trailed the return of the overall market (when looked at over 5 and 10 year periods).
Today’s lesson in a nutshell: Just because a stock is big, in the news, and popular doesn’t mean it should be overweight in your portfolio.
Past performance is not a guarantee of future results.
Source: Dimensional, using data from CRSP and Compustat. Includes all US common stocks. Largest stocks identified at
the end of each calendar year by sorting eligible US stocks on market capitalization using data from CRSP. Market is
represented by the Fama/French Total US Market Research Index. Excess return for each stock is the difference in
annualized compound returns between the stock and the market, computed from the first month following initial
classification in the top 10. Stocks in the sample are required to have at least 36 months of returns data following
classification in the top 10.