The Argument for Diversification: Beware of Top Performing Stocks

Chart showing top 10 US stocks and how they lag the US market after reaching their height.

Wes Crill, PhD
Senior Investment Director and Vice President
Dimensional Fund Advisors

The Magnificent 7 stocks* continue to capture the focus of investors as these large growth names have outpaced the bulk of global equities. Their outperformance is notable because eye-popping returns for top stocks tend to occur before they reach the top of the market. Once there, subsequent returns tend to lag the market.

This is a cautionary tale for investors expecting continued outperformance from the Magnificent 7. In fact, rather than seeking additional exposure to these mega cap stocks, investors should ensure their portfolios are broadly diversified to capture the returns of whatever companies ascend to the top in the future.

Chart showing top 10 US stocks and how they lag the US market after reaching their height.

Annualized returns in excess of the US market before and after joining the top 10 largest US stocks, January 1927–December 2022

 

Past performance is not a guarantee of future results.

*In USD. Data from CRSP and Compustat. Companies are sorted every January by beginning-of-month market
capitalization to identify first-time entrants into the top 10.
The market is defined as the Fama/French Total US Market Research Index. The Fama/French indices represent
academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a
benchmark. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide
consulting services to, Dimensional Fund Advisors LP. See “Index Description” for a description of the Fama/French index
data.
Indices are not available for direct investment. The index has been included for comparative purposes only.

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