Diversification made us owners of nearly everything.

An investor in 1950 had less to worry about.

Consider an investor in 1950. If he owned stocks at all, he probably owned a handful that he or his broker had picked: a railroad, a utility, perhaps the bank in town. Harry Markowitz would not publish Portfolio Selection until 1952, and the first retail index fund was a quarter century away. He knew what he owned because he had chosen each name.

There was also less to worry about. The birth control pill would not be approved until 1960, abortion was illegal in nearly every state, and no publicly traded industry was built around abortion, embryo-destructive research, or pornography.

Markets were still probably quite efficient, but concentration might also have been a more defensible choice than today. As Larry Swedroe and Andrew Berkin note in The Incredible Shrinking Alpha, individual investors held about 90% of U.S. stocks directly after World War II. A diligent investor was mostly trading against other individuals rather than institutions, and he had a fair chance of finding mispriced companies. Today the proportions are roughly reversed.

Seventy-five years later, the research has moved steadily toward broad diversification. Thirty stocks may match the market's volatility, but tracking error keeps falling until a portfolio holds a few hundred well-chosen names, and diversified factor exposures require hundreds or thousands. The index fund revolution of the 1970s onward has made that kind of investing cheap and available to everyone, and a domestic total market fund today holds more than three thousand U.S. companies.

The same decades brought the sexual revolution and a decline in the public morality that once kept certain businesses at the margins. Contraceptives and abortifacients are now made and sold by large, respectable public companies.

So for most investors today, the prudent default is to own nearly everything, and nearly everything now includes many companies whose conduct ought to be scrutinized. The investor in 1950 knew each company he owned and had little reason to ask the question. The investor today has every reason to ask it, and often no practical way to answer it.

Why moral investing grew up when it did

Moral investing grew up alongside the high-name-count portfolio, because the question of what you are supporting becomes pressing once you own more companies than you could ever read about. Unfortunately, many early answers set the diversification research aside and returned to concentrated stock picking with a moral filter on top, asking investors to choose between conscience and prudence.

We don't think that choice is necessary. The same research tells us how much diversification is enough and what a screen actually costs. A careful set of exclusions, applied with the tools any serious systematic manager uses, can keep tracking error modest while letting the investor say with confidence what he owns. We'll take up the numbers behind that claim in a future letter.

This newsletter is general education and is not investment, tax, or legal advice.