If you’ve been stashing money into an S&P 500 index fund, you probably feel pretty good about yourself. You’re following the golden rule of investing: “Don’t put all your eggs in one basket.” By buying the 500 largest companies in America, you’ve got a piece of everything from oil and banks to breakfast cereal and bandages, right?
Well, I hate to be the one to burst your bubble, but that “diversified” portfolio isn’t nearly as balanced as it used to be. In fact, it’s starting to look less like a broad slice of the American economy and more like a massive bet on a few guys in Silicon Valley.
Here’s why your favorite index fund might be setting you up for a rougher ride than you bargained for.
The big guys are eating the room
The S&P 500 is a “market-cap weighted” index. That’s just a fancy way of saying the bigger the company, the more it matters. In a normal world, that makes sense. You’d expect Apple to have a bigger impact on the market than a regional utility company.
But we’re not in a normal world anymore. According to S&P Global data, the concentration in the top 10 stocks has hit levels we haven’t seen in half a century. We’re talking about a situation where just 10 companies now account for roughly 40% of the entire index’s value.
Think about that. When you invest in an S&P 500 index fund, you’re buying 500 companies, but Goldman Sachs research shows that almost half your money is riding on the success of just 10 of them. If Nvidia or Microsoft has a bad day, it doesn’t matter if the other 490 companies are doing great—the index is going down and your money is going with it.
It’s the dot-com bubble all over again (sort of)
I’ve seen this movie before. Back in the late ’90s, everyone thought the internet was going to change the world overnight. They were right about the “changing the world” part, but they were wrong about how much they should pay for the stocks.
Today, the hype is all about Artificial Intelligence. While AI is clearly a big deal, the valuations have climbed to levels that make some of us older investors a little twitchy. Recent market analysis suggests the S&P 500 is now more concentrated than it was at the absolute peak of the dot-com bubble in 2000.
History tells us that when a few stocks get this big, they eventually stop outperforming the rest of the market. When the tech bubble popped in 2000, the S&P 500 went on to have a “lost decade” where it actually declined, while the “boring” stocks—the ones not in the top 10—actually did okay.
Why this matters for your retirement
The whole point of an index fund is to give you a smooth ride through the ups and downs of the market. But when a handful of tech stocks are driving the bus, you’re exposed to “single-stock risk.”
If a major tech player runs into a massive antitrust lawsuit or their AI chips don’t sell as fast as expected, your “safe” index fund could take a massive hit. You’re not protected by the other 490 companies because they’re too small to offset the damage.
How to actually diversify
So, what’s an investor to do? Don’t panic and sell everything—that’s usually the worst move you can make. But you should check if you’re as diversified as you think you are. Here are a few ways to fix the tilt:
1. Consider an equal-weighted fund: There’s a version of the S&P 500 where every company gets the same weight (0.2% of the index). Funds like the Invesco S&P 500 Equal Weight ETF (RSP) give you a much truer version of diversification. When tech slumps, these funds often hold up much better.
2. Look at mid-cap and small-cap stocks: The S&P 500 only covers the giants. Adding a fund that tracks smaller companies can give you exposure to the parts of the economy that aren’t tied to the AI race.
3. Don’t forget international: U.S. stocks have been the winners for a long time, but that won’t last forever. Investing in companies outside the U.S. is a great way to make sure you’re not just betting on one country’s tech sector.
At the end of the day, index funds are still one of the best ways for regular people to build wealth. But don’t let the “set it and forget it” mantra blind you to the fact that the index itself has changed.
It’s time to peek under the hood and make sure you’re not accidentally betting your entire future on a handful of tech billionaires.