Why Your S&P 500 Investments Are Riskier Than You Think – The Hidden Danger of Concentration Risk

Concentration risk is the investing equivalent of ‘putting all your eggs in one basket’, it is the risk of holding a portfolio tilted heavily towards certain assets, sectors or countries. It can lead to wilder swings in returns compared to a more diversified approach. 

Perhaps the first piece of advice investors receive in their journey is to construct a balanced portfolio which will provide smoother long-term returns, but this has become increasingly trickier than it seems. 

Whether you have hand picked stocks or even invested in a broad index your portfolio is likely suffering from an increasing amount of concentration risk.

Is the S&P 500 diversified?

Well, not really… since it is a market capitalisation weighted index, larger companies have a heavier impact on the index performance (as opposed to an equal weight index, where all companies have the same impact on performance). So, perhaps unintuitively, the go-to index for passive investors of 500 US stocks suffers from significant concentration risk. 

The rise of the ‘Magnificent Seven’ has been well documented and they now make up one third of the index collectively. In fact, they have contributed more than half of the index’s returns in the first half of the year.

mag 7 in S&p500

What does this mean in reality?

To highlight the risk here, borrowing our earlier analogy, those seven eggs are much larger, taking up a significant amount of space in the basket and will heavily dictate our portfolio outcome if their bull run ends and they underperform. 

For example, if you remove NVIDIA the remaining six stocks struggled to keep pace with the S&P 500 in the first half of the year, and with wilder swings.

H1 2024 performance of Mag 7 vs S&P500

In fact, the average annualised volatility of these 7 stocks is almost triple that of the S&P 500 index, resulting in bigger deviations in performance. It would be prudent to consider supplementing your portfolio with an S&P 500 ETF that is equal-weighted, included in all our flagship Core portfolios, which reduces this concentration risk.

volatility of Mag 7 vs S&P500

There’s a whole world out there

Diversification can take many forms, whilst the S&P 500 represents more than 80% of total US equity market capitalisation, it represents only 48% of the world equity market. That is a lot of exposure we are missing out on, so diversifying geographically with investments in other developed and developing markets is important.

World equity market cap

Similarly, we should diversify into other asset classes. Bonds have one of the most favourable entry points in recent times with yields at 15-year highs given the current interest rate environment.

Commodities are also an important pillar of a diverse portfolio. Gold in particular, often used as a defensive asset before a market downturn would help reduce volatility.

How to diversify your investments with Syfe Wealth

Our flagship core portfolios allow you to effortlessly invest in a diverse portfolio of equities, bonds and commodities across countries and sectors.

Each of Core Equity 100Core Growth, Core Balanced and Core Defensive  are catered to different risk appetites, but they are all professionally managed using low-cost ETFs with exposure to 1000s of underlying securities per portfolio.

The global and asset class exposures of these portfolios are managed as markets shift, reducing concentration risk, so you don’t have to. 

Ritesh Ganeriwal, our Managing Director of Investment & Advisory, recently shared his insights with CNA Money Mind on how the Mag 7 Companies are shaping market dynamics, their current valuations, concentration risks, and strategies for diversification beyond traditional indices. 


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