Market and correlation: why ten stocks can be just two bets

Transcript

Two banks, three years, every single day: their prices moved very closely together. Coca-Cola and Nvidia, on the other hand, even moved slightly against each other. I'm Peter, and today I'll show you why ten stocks can sometimes be just two bets. You'll learn what correlation is, how much stocks hang on the overall market, and where concentration risk hides.

Correlation is a number between minus one and plus one. Plus one means two stocks always rise and fall together. Zero means they have nothing to do with each other. Minus one means when one goes up, the other goes down. Think of a shop that sells umbrellas and one that sells sunscreen. When it rains, one wins, when the sun shines, the other. If you own both, the weather no longer matters to you.

We checked this with the prices from our own database, three years, 753 trading days. The two oil companies Exxon and Chevron: 0.82. The two banks JPMorgan and Bank of America: 0.75. Coca-Cola and Pepsi: 0.60. And then across industries: Exxon and Microsoft sit at practically zero, Coca-Cola and Nvidia at minus 0.25. The lesson: companies in the same industry depend on the same weather. For oil it is the oil price, for banks it is interest rates.

And then there is a current that carries almost everyone along: the overall market. You see it most clearly with the biggest companies, because they are a large part of the index themselves. By mid-2025, the ten largest companies made up almost 40 percent of the S&P 500, a level not seen since the mid-1960s. In our data, Nvidia moved clearly with the market since June 2025, at 0.63. Coca-Cola and Exxon even moved slightly against it in that time. So if you buy a big index fund, a good part of what you buy is ten companies.

Now picture a portfolio with ten stocks. Sounds spread out. But five of them are oil companies and five are banks. Because they move so closely together within their industry, you really only have two bets: one on the oil price and one on interest rates. That is called concentration risk. It likes to hide, because on paper everything looks colorful. So what counts is not the number of stocks, but how differently they move.

And now the uncomfortable truth. Two researchers, Longin and Solnik, studied almost 40 years of the five largest stock markets in the world. The result: in falling markets, prices move closer together, in rising markets they do not. So spreading helps least exactly when you need it most. That does not mean spreading is useless. It means: spread across truly different industries, countries and company sizes, and expect that in a crash almost everything falls at the same time.

That is exactly what the diversification bar in your watchlist looks at, as a number from 0 to 100. With Pro, you see the spread by sector, region, size and correlation, with a swap idea. That way you can tell whether your ten stocks are really ten.

In short: same industry means same weather, the biggest companies pull the market along, and in a storm everyone moves closer together. In the next lesson, we look at the whole market: is it cheap or expensive right now? Important: this is not financial advice.