When the index is really just one bet
An index fund gives you the average of the market, weighted by size. When size is concentrated, so are you, whether you meant to be or not.
Know what you actually own when you own the index.
How When the index is really just one bet works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
One investment is the fund
Most go to zero and that is not a failure of selection, it is the shape of the asset class. It is why a venture investor has no use for a company that will merely do quite well.
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Market-cap weighting means you own more of whatever went up
A standard index fund holds companies in proportion to their size. As a company's price rises, its weight rises, so you automatically own more of it. That is elegant when it works and it means the fund mechanically drifts toward whatever has recently performed best, which is often whatever is now most expensive.
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Which means the diversification is an illusion at the top
You may hold 500 companies and still have a very large share of your money in fewer than ten, all in one sector, all exposed to the same handful of risks. Owning 500 names does not diversify you if the top ten dominate the weight. Diversification comes from low correlation, not from the length of the list.
This is not an argument against index funds. It is an argument for knowing what is in yours. Look up the top ten weights. Most people are surprised.
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The maths cuts both ways
Concentration is why the index has done so well: a few extraordinary businesses did the heavy lifting and the weighting let you own them. It is also why it can stall. If the largest positions go sideways, it becomes arithmetically difficult for the index to make new highs no matter what the other 490 do.
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The fix, if you want one, is boring
An equal-weight version of the same index, or deliberately adding exposure to the parts the cap-weighted index under-owns: smaller companies, other countries, other sectors. None of it is exciting and all of it is cheap.
You can name the combined weight of your index fund's top ten holdings.
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An index fund gives you the average of the market, weighted by size. When size is concentrated, so are you, whether you meant to be or not.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.