Lessons From the Startling Statistics of 2023’s Stock Market

It’s been a great year for U.S. stocks so far. The total return of U.S. stocks was 20.4% as of July, as measured by the net asset value of the Vanguard Total Stock Market (VTI). VTI is the broadest of the U.S. stock index funds, owning 3,837 individual stocks. But here are some facts you may not know: 

• Seven stocks (or about 0.2% of the total holdings) comprise about 23.5% of the total value of the U.S. stock market. These seven (aka the “magnificent seven”) are Apple, Microsoft, Alphabet, Amazon, Meta, Tesla and Nvidia, all tech-related companies. 

• Those seven stocks have a much greater value than the Extended Market Index Fund (VXF), which owns 3,669 individual stocks that are not in the S&P 500.  
• Apple alone has a greater market capitalization than the iShares Russell 2000 (IWM). 
• Those seven stocks accounted for the vast majority of the return of U.S. stocks. It was nearly all of the return though May, but July and August was broader. 

With hindsight, of course, there are many explanations for why these seven companies did so well, including the explosion of artificial intelligence. But the startling statistics point to some timeless advice I urge investors to remember. 

1. Smart money is dumb. This isn’t the first year so-called smart beta has been trounced by the market. Underweighting those “obviously overvalued stocks” has backfired. The DFA Small Cap Value Fund (DFSVX) underperformed VTI by 1.48 percentage points annually over the past 15 years. Most smart beta funds badly lagged. Of course it would be just as dumb to overweight these magnificent seven. 
2. Overweighting parts of the market is not diversification, it’s active investing. 
3. Market returns are aways driven by a small number of stocks. Admittedly, this year is extreme but typically 4% of the stocks drive nearly all the return of the market. The other 96% of stocks return about the same as a Treasury Bill.  
4. There is only one way to own next year’s top stocks, whether they be the magnificent seven or the fantastic 40 or whatever financial media dubs the number of future hot stocks, and that is to own them all. 

I’m grateful for this year’s magnificent seven. But I’m even more grateful Vanguard founder John C. Bogle gave us the total stock index fund to assure our fair share of the returns irrespective of which stocks drive the market. As he once put it, “Don't look for the needle in the haystack. Just buy the haystack.”