Jus because they make a big part of the index doesn't automatically mean they're overvalued. Apple, Alphabet, Amazon, Meta are huge, highly profitable, and with high growth. Their valuations make more or less sense. Tesla is certainly an outlier though, and highly overvalued.
What scale would you recommend using to decide proportionality of one’s investments? The arbitrary number of publicly listed companies? Divvy up between 500 or 3,000? An arbitrary blend of net income and number of publicly listed US companies?
My point is if 6 companies are each growing their profits for 10+years in amounts equal to or greater than profits of entire other industries, you might want to weight it a bit higher.
From tone I'm assuming this is a rhetorical question, but I believe the answer is obviously yes?
Statistical variance is orthogonal to profit. You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
I also believe that what scale to use to decide proportionality is not an open an shut case and is actually an important question for each investor.
Not an expert, corrections welcome.
No, I meant to bring up how weird it sounds that investing more in businesses that earn more profit is volatile.
> Statistical variance is orthogonal to profit.
I do not know what this means.
> You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
It is a huge risk to invest in the single highest earning company, but that is not what an equity index fund tracking the sp500 or russel 3000 is doing.
What equity index funds are doing is investing money in the entire market, all of the options, at the proportion that everyone else as a collective is investing into them.
If there were a scenario where 99% of the equity index fund was invested in 1 company, then the entire investing world is basically saying the safest investment is only the 1 public company.
What I think you are actually referring to is the volatility of the accuracy of the investing world’s opinion as a whole, or efficient market hypothesis. Which is the basis of investing in index funds (that you know only as much or less than what the entire market knows). If you do not assume that, then index funds do not make sense.