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Diversification is often described as the only free lunch in investing. The idea is simple. If you spread your investments across different stocks, the risks tend to even out over time. It’s a principle so widely accepted that it is rarely questioned.
But diversification depends not just on how many stocks you hold, but on how those stocks behave. When a few names begin to dominate outcomes, what appears diversified can, in practice, become something else entirely.
According to a study by Bastiaan van der Linden of the University of Amsterdam titled “Market Concentration and Its Effect on Diversification,” when market concentration increases, the diversification benefit of an index declines, with a growing share of returns driven by fewer companies.
If we apply this framework to the local market, the picture tells a different story. The Philippine Stock Exchange index (PSEi) has so far declined by only 2.4 percent from the beginning of the year to date. On the surface, it suggests that the market is holding up reasonably well.
