Nerd Rule

One of the important characteristics of the stock market that many newer investors may not realize is how widely distributed the size of companies is on Wall Street.

Simply put, you have a very small group of very, very large companies. You also have a very large group of tiny companies.

Here’s a super nerdy rule of thumb for finding the largest X% of stocks that make up Y% of its total market cap.

Take the square root of X and multiply by 10, and that’s a good ballpark for Y.

For example, the largest 16% of stocks should make up 40% of the total market cap.

Or 49% should make up about 70%. This should work for just about any reasonably-sized index or randomly-selected portfolio.

This is like the 80/20 Rule but in this case, it’s the 50/25 Rule.

No, it’s not perfect, but it’s a pretty good estimate.

Posted by on April 16th, 2021 at 10:50 am


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