Already a subscriber?A unique feature of the Australian stock market is the dominance of the financials and materials industries. When looking at the ASX200 sector weights,has tended to be predominantly confined to the Australian market but as investors diversify overseas is there now a similar risk growing in the US with the emergence of the Magnificent Seven.Investing in the larger cap part of the Australian market in line with the index is problematic.
The reason this is a concern is because it has been shown that over the long-term if an investor owns a small number of stocks there is a risk of missing out on some of the market’s star performers.in line with the index is problematicIt is very important that you capture all segments of the market and not just the large companies, with the long-term average return for smaller company stocks higher than the average return of larger company stocks.
The lessons from the Australian market and concentration risk of only owning a small number of large company stocks are relevant to the US. While the current concentration risk of the Magnificent Seven is not as extreme as the Australian market and the dominance of banks and miners, there is a similar growing risk of just owning the market in the US.