Dimensional Researchers Address Concentration Risk in MarketWatch Article
In an opinion piece for MarketWatch, Dimensional Global Head of Research Wei Dai and Research Director and Vice President Mamdouh Medhat discuss the highly concentrated US stock market and the unease around high valuation ratios of the largest US companies.
While investors are seeing a series of sales pitches to address these concerns, the authors said these solutions—such as abandoning market weights for fundamental or equal weights to curb concentration and emphasizing “quality” characteristics to get bang for the buck—are often inefficient.
“Research suggests investors are better off embracing a global portfolio and directly pursuing well-known, reliable return premiums, namely those associated with smaller size, lower valuation, and higher profitability,” they write.
In the article, the authors offer a few ways to help a portfolio be less tied to the fortunes of a few companies:
- Rather than relying on inefficient solutions, investors can improve their portfolio’s prospects by simply diversifying beyond the US.
- Investors might also pursue premiums within US large caps by tilting away from mega cap growth and toward mid caps, lower valuations, and higher profitability shares.
- Investors may want to avoid some of the implementation costs associated with the indexing approach that many equal-weighted and quality-focused strategies tend to use.
Read the article here.
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