Just own only top 7 stocks in QQQ?

[whywork]

The top 7 stocks in QQQ account for 50% of its allocation. These have averaged 38% returns while QQQ has averaged 23%. That means the other 50% of the stocks averaged around 10%.

Instead of owning QQQ why not simply hold these 7 stocks? Ofcourse one of these could be underperforming in the future and we may need to sell. But I feel the return difference (38 vs 23) is too high to not take that risk.

Here are those stocks. I'm planning to move my 401k into these stocks as per below allocation (ratios similar to how they are in QQQ) and keep rebalancing it to be similar to QQQ ratios. What are your thoughts on this?

AAPL (20%)
AMZN (20%)
MSFT (20%)
GOOG (20%)
FB (7%)
TSLA (7%)
NVDA (6%)

[FLBiker]

The top 7 stocks in QQQ account for 50% of its allocation. These have averaged 38% returns while QQQ has averaged 23%. That means the other 50% of the stocks averaged around 10%.

Instead of owning QQQ why not simply hold these 7 stocks? Ofcourse one of these could be underperforming in the future and we may need to sell. But I feel the return difference (38 vs 23) is too high to not take that risk.

Here are those stocks. I'm planning to move my 401k into these stocks as per below allocation (ratios similar to how they are in QQQ) and keep rebalancing it to be similar to QQQ ratios. What are your thoughts on this?

AAPL (20%)
AMZN (20%)
MSFT (20%)
GOOG (20%)
FB (7%)
TSLA (7%)
NVDA (6%)

It is certainly possible that those 7 companies will continue to beat the rest of the index.  However, you're definitely buying high on them -- they became the 7 biggest by having lots of growth.  Does that mean they will have the same growth growing forward?  It's possible, but it certainly isn't guaranteed.  I don't personally pick stocks based on historical returns, because they do not guarantee future returns.

[Radagast]

It seems like you are looking for a winning strategy. However, buying the seven stocks that did best over the last ten years is more likely to be a losing strategy. An example of a winning strategy is to buy the seven stocks that will do best over the next ten years.

[Rdy2Fire]

I can see where your going with that but keep in mind QQQ's holdings/percentages have changed over time.

Given that there have been some adjustments and although now these stocks are more heavily weighted and their values have significantly increased you may or may not have ended up much better depending on numerous factors like how many shares of each you initially purchase, did you set it and forget it or rebalance etc. I realize OP said their would be similar holding % and rebalancing but this may be a bit of a challenge as well.

Personally I purchased my 1st 100 QQ share at $36 so it was LONG ago and then continued to purchase more over time but have never purchases any over $125 a share (again been a while) and am very happy with the returns but with QQQ I went with the set it and forget it approach.

[bacchi]

It seems like you are looking for a winning strategy. However, buying the seven stocks that did best over the last ten years is more likely to be a losing strategy. An example of a winning strategy is to buy the seven stocks that will do best over the next ten years.

Exactly. The OP's strategy might end up looking like CSCO and JDSU in early 2000. Hey, the internet runs on routers and fiber can only increase. What could go wrong?

[Systems101]

Instead of owning QQQ why not simply hold these 7 stocks?

Do you understand the risks you're taking on?

Let's be honest: Concentration builds wealth.  Even Buffett will say so.  But it's a lottery.  Some small percentage will make outsized gains and make the news, many more will be trapped working longer or living poorer.  You don't hear about them because those folks don't want to talk about it.  Diversification protects wealth.  Buffett says that too...

Specifically, concentrated portfolios are not advisable because:

• I don't drive by looking in my rear view mirror.  I look forward.  In the case of stocks, we know prediction is hard (impossible if you believe EMH).  Don't be taken in by the bandwagon effect (or other biases for that matter).
• It's fun to look for the next big thing, but concentrated portfolios are extremely volatile, and contain risks (among them idiosyncratic risks) that are not solely modeled by volatility (which is how the naïve and academic papers talk about risk in stocks vs bonds).  We use diversification to eliminate the idiosyncratic risk.  Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value. For Technology, Biotech and Metals & Mining, the numbers were considerably higher.  (Technology was 57%)
• You've stated return numbers, but nothing about the time frame that is talking about.  Is it 1 year? 20?  Even in indexing people here make an argument about using US stock market vs international.  US has outperformed for something like 10 years.  International outperformed the 8 years before that, etc.  If you're entire investing experience (or data set) is 10 years, you have a skewed view of reality!

Do you *really* understand the risks?

[ChpBstrd]

Picking the right sector is hard, and this is what an epic bull market looks like! Google "sector rotation quilt" to see examples from the GFC and earlier.

[EliteZags]

I bought MRNA at $25 last Feb and its pushing towards 2000% gain, nothing else in my portfolio comes close to that return, why not just move my entire portfolio into MRNA- what's the point of holding anything else?

[bacchi]

I bought MRNA at $25 last Feb and its pushing towards 2000% gain, nothing else in my portfolio comes close to that return, why not just move my entire portfolio into MRNA- what's the point of holding anything else?

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[PDXTabs]

I'd personally be way more interested in holding QQQ or even QQQJ than the top seven.

[hodedofome]

Why not just buy FNGU lol.

[whywork]

Why not just buy FNGU lol.

Yeah I considered this as well but dropped off due to few reasons

1) Few stocks not being reliable like baba and bidu and even twtr
2) It being an ETN which can be called off anytime
3) No dividend payments

[boarder42]

It seems like you are looking for a winning strategy. However, buying the seven stocks that did best over the last ten years is more likely to be a losing strategy. An example of a winning strategy is to buy the seven stocks that will do best over the next ten years.

Yep this is recency bias at it's finest. Large growth is historically the worst performing asset class I'd make a 100k bet that AVUV the small cap value index I use beats the 7 stocks above over the next decade. I'll even give the op a 20% advantage.

[boarder42]

Instead of owning QQQ why not simply hold these 7 stocks?

Do you understand the risks you're taking on?

Let's be honest: Concentration builds wealth.  Even Buffett will say so.  But it's a lottery.  Some small percentage will make outsized gains and make the news, many more will be trapped working longer or living poorer.  You don't hear about them because those folks don't want to talk about it.  Diversification protects wealth.  Buffett says that too...

Specifically, concentrated portfolios are not advisable because:

• I don't drive by looking in my rear view mirror.  I look forward.  In the case of stocks, we know prediction is hard (impossible if you believe EMH).  Don't be taken in by the bandwagon effect (or other biases for that matter).
• It's fun to look for the next big thing, but concentrated portfolios are extremely volatile, and contain risks (among them idiosyncratic risks) that are not solely modeled by volatility (which is how the naïve and academic papers talk about risk in stocks vs bonds).  We use diversification to eliminate the idiosyncratic risk.  Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value. For Technology, Biotech and Metals & Mining, the numbers were considerably higher.  (Technology was 57%)
• You've stated return numbers, but nothing about the time frame that is talking about.  Is it 1 year? 20?  Even in indexing people here make an argument about using US stock market vs international.  US has outperformed for something like 10 years.  International outperformed the 8 years before that, etc.  If you're entire investing experience (or data set) is 10 years, you have a skewed view of reality!

Do you *really* understand the risks?

Buffett only beat small value for one decade.  He's lost since the 80s to small value. And he's a value investor self proclaimed.

[hodedofome]

If you’re gonna basically own the FANGMAN stocks at least sell them if they drop below the 200 day moving average and move to cash. That’s the only way to simply play high growth stocks/expensive stocks over the long term.

[NorCal]

I remember seeing a great presentation from a hedge fund manager back when I was getting my MBA. This was 2007ish, so the numbers are a bit dated, but the premise still holds.

He put up a chart showing cumulative returns if you had bought the S&P 500 index fund in 1980 and held it. I forgot the exact number, but it was the X,000% return chart we’ve all become familiar with.

He then put up the same chart, but this time you were buying the companies in the S&P 500, but never rebalancing it. You were just buying these companies once and holding them. This portfolio LOST 80% of its value in those ~27 years.

Part of what makes indexing work is the process of adding and removing companies from the index.

[SparkyPeanut]

I remember seeing a great presentation from a hedge fund manager back when I was getting my MBA. This was 2007ish, so the numbers are a bit dated, but the premise still holds.

He put up a chart showing cumulative returns if you had bought the S&P 500 index fund in 1980 and held it. I forgot the exact number, but it was the X,000% return chart we’ve all become familiar with.

He then put up the same chart, but this time you were buying the companies in the S&P 500, but never rebalancing it. You were just buying these companies once and holding them. This portfolio LOST 80% of its value in those ~27 years.

Part of what makes indexing work is the process of adding and removing companies from the index.

Wow! I would have never thought that.

[SparkyPeanut]

I remember seeing a great presentation from a hedge fund manager back when I was getting my MBA. This was 2007ish, so the numbers are a bit dated, but the premise still holds.

He put up a chart showing cumulative returns if you had bought the S&P 500 index fund in 1980 and held it. I forgot the exact number, but it was the X,000% return chart we’ve all become familiar with.

He then put up the same chart, but this time you were buying the companies in the S&P 500, but never rebalancing it. You were just buying these companies once and holding them. This portfolio LOST 80% of its value in those ~27 years.

Part of what makes indexing work is the process of adding and removing companies from the index.

Wow! I would have never thought that.

I've heard experienced investors say why should they hold the S&P500 index which includes so many companies that they don't want, and companies at values that they don't want, when they can just pick and choose the companies they wish to buy shares in.

Your anecdote is very interesting.

[Radagast]

I remember seeing a great presentation from a hedge fund manager back when I was getting my MBA. This was 2007ish, so the numbers are a bit dated, but the premise still holds.

He put up a chart showing cumulative returns if you had bought the S&P 500 index fund in 1980 and held it. I forgot the exact number, but it was the X,000% return chart we’ve all become familiar with.

He then put up the same chart, but this time you were buying the companies in the S&P 500, but never rebalancing it. You were just buying these companies once and holding them. This portfolio LOST 80% of its value in those ~27 years.

Part of what makes indexing work is the process of adding and removing companies from the index.

Ok, I don't really buy that but maybe I am missing something.

Here is an example of an ancient fund that bought equal shares of 30 companies in 1935, and then never touched anything ever again. It is still around, and it has in fact done better than the S&P500.
https://www.wsj.com/articles/the-fund-that-does-a-lot-by-doing-nothing-11576854661

^(sorry pay walled version, but that isn't where I first found out about it anyhow. you can do some googling if interested.)

Doing nothing is a shockingly good strategy. Or perhaps S&P companies do business in big shiny transient fads, and you only buy them near the top, causing underperformance. Dunno.

No paywall:
https://www.morningstar.com/articles/960641/the-strange-and-happy-tale-of-voya-corporate-leaders-trust

[MustacheAndaHalf]

The top 7 stocks in QQQ account for 50% of its allocation. These have averaged 38% returns while QQQ has averaged 23%.

Over what time period?  I'd suggest looking at each year's performance, comparing those 7 funds with the QQQ.  Then you will see how the performance varies over several years.

Another approach is 2x leveraged QQQ calls.  QQQ is $372 as of yesterday, so you might buy $185 strike calls expiring Dec 2022.  If that costs $192.50, that's like having 1.94x leverage.  Keep in mind leverage cuts both ways - you can lose twice as much as buying the QQQ, or gain twice as much.

It's worth keeping in mind that last year was ideal for tech companies.  People shopped on Amazon (malls closed), watched Netflix (theaters closed), held meetings online (Docusign wins), etc.  So when you measure performance, don't weight 2020 performance that heavily, because it's unlikely to repeat.

[NorCal]

I remember seeing a great presentation from a hedge fund manager back when I was getting my MBA. This was 2007ish, so the numbers are a bit dated, but the premise still holds.

He put up a chart showing cumulative returns if you had bought the S&P 500 index fund in 1980 and held it. I forgot the exact number, but it was the X,000% return chart we’ve all become familiar with.

He then put up the same chart, but this time you were buying the companies in the S&P 500, but never rebalancing it. You were just buying these companies once and holding them. This portfolio LOST 80% of its value in those ~27 years.

Part of what makes indexing work is the process of adding and removing companies from the index.

Ok, I don't really buy that but maybe I am missing something.

Here is an example of an ancient fund that bought equal shares of 30 companies in 1935, and then never touched anything ever again. It is still around, and it has in fact done better than the S&P500.
https://www.wsj.com/articles/the-fund-that-does-a-lot-by-doing-nothing-11576854661

^(sorry pay walled version, but that isn't where I first found out about it anyhow. you can do some googling if interested.)

Doing nothing is a shockingly good strategy. Or perhaps S&P companies do business in big shiny transient fads, and you only buy them near the top, causing underperformance. Dunno.

No paywall:
https://www.morningstar.com/articles/960641/the-strange-and-happy-tale-of-voya-corporate-leaders-trust

It's a bit tricky to find the exact historical components of the S&P 500, but here's how I think of it.  Just shy of 25% of the S&P 500 index is Apple, Microsoft, Amazon, Facebook, Google, and Nvidia.  These companies have made up a significant portion of the index's total returns for many years.  I'm fairly confident that these companies have contributed more than 90% of the index's total returns for many years, but I don't have a good source for that.

None of these were public companies in 1980, and most weren't even founded until the late 90's or early 00's.  You would have completely missed out on most of these stocks if you simply bought some companies at an earlier point in time and held onto them.

Essentially, the market is made up of a small number of very large winners and a large number of long-term losers.

Taking a concentrated bet on these firms now is like taking a long term bet on oil & gas companies in 2008 or steel companies in the 1960's.  You're buying the dominant companies of today, but likely missing out on the dominant companies of tomorrow.  It doesn't mean that these companies won't continue to do well.  They're just almost guaranteed to fall behind the broader market at some point.

[Radagast]

I remember seeing a great presentation from a hedge fund manager back when I was getting my MBA. This was 2007ish, so the numbers are a bit dated, but the premise still holds.

He put up a chart showing cumulative returns if you had bought the S&P 500 index fund in 1980 and held it. I forgot the exact number, but it was the X,000% return chart we’ve all become familiar with.

He then put up the same chart, but this time you were buying the companies in the S&P 500, but never rebalancing it. You were just buying these companies once and holding them. This portfolio LOST 80% of its value in those ~27 years.

Part of what makes indexing work is the process of adding and removing companies from the index.

Ok, I don't really buy that but maybe I am missing something.

Here is an example of an ancient fund that bought equal shares of 30 companies in 1935, and then never touched anything ever again. It is still around, and it has in fact done better than the S&P500.
https://www.wsj.com/articles/the-fund-that-does-a-lot-by-doing-nothing-11576854661

^(sorry pay walled version, but that isn't where I first found out about it anyhow. you can do some googling if interested.)

Doing nothing is a shockingly good strategy. Or perhaps S&P companies do business in big shiny transient fads, and you only buy them near the top, causing underperformance. Dunno.

No paywall:
https://www.morningstar.com/articles/960641/the-strange-and-happy-tale-of-voya-corporate-leaders-trust

It's a bit tricky to find the exact historical components of the S&P 500, but here's how I think of it.  Just shy of 25% of the S&P 500 index is Apple, Microsoft, Amazon, Facebook, Google, and Nvidia.  These companies have made up a significant portion of the index's total returns for many years.  I'm fairly confident that these companies have contributed more than 90% of the index's total returns for many years, but I don't have a good source for that.

None of these were public companies in 1980, and most weren't even founded until the late 90's or early 00's.  You would have completely missed out on most of these stocks if you simply bought some companies at an earlier point in time and held onto them.

Essentially, the market is made up of a small number of very large winners and a large number of long-term losers.

Taking a concentrated bet on these firms now is like taking a long term bet on oil & gas companies in 2008 or steel companies in the 1960's.  You're buying the dominant companies of today, but likely missing out on the dominant companies of tomorrow.  It doesn't mean that these companies won't continue to do well.  They're just almost guaranteed to fall behind the broader market at some point.

It could be the capitalization-weighted starting point causing poor returns. If you buy in cap weight and hold, then your big winners will turn to losers and you won't have enough future winners to make it up. Whereas starting equally weighted your future winners would more than make up for the tiny percentage of past winners.

[RyanAtTanagra]

Wasn't this a motley fool investment strategy that was later shown to be horrible?

[index]

The top 7 stocks in QQQ account for 50% of its allocation. These have averaged 38% returns while QQQ has averaged 23%. That means the other 50% of the stocks averaged around 10%.

Instead of owning QQQ why not simply hold these 7 stocks? Ofcourse one of these could be underperforming in the future and we may need to sell. But I feel the return difference (38 vs 23) is too high to not take that risk.

Here are those stocks. I'm planning to move my 401k into these stocks as per below allocation (ratios similar to how they are in QQQ) and keep rebalancing it to be similar to QQQ ratios. What are your thoughts on this?

AAPL (20%)
AMZN (20%)
MSFT (20%)
GOOG (20%)
FB (7%)
TSLA (7%)
NVDA (6%)

So the top 7 QQQ stocks 10 years ago in 2011 were:



Using your same % allocation to the top 7 QQQ stocks from 2011 here is the performance (starts in 2012 as FB was not public in 2011):



This is an example of why past performance does not indicate future performance.