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S&P 500 Concentration Risk

Observant1
edited February 13 in Other Investing
Some in the financial industry warn of excessive concentration in the S&P 500 which may elevate risks
to investors. Recent research by Mark Kritzman, chief executive of Windham Capital Management,
and David Turkington, head of State Street Associates concludes you should not diversify out of
an S&P 500 or total stock market fund to reduce concentration risk.

“'Taking risk off the table every time the market gets more concentrated would have been
very harmful historically,' Kritzman tells me. 'It may help you avoid some fraction of the selloffs,
but you incur a huge opportunity cost in losing out on the run-ups.'”

https://www.msn.com/en-us/money/markets/the-big-scary-myth-stalking-the-stock-market/ar-AA1WhMcI

Comments

  • sma3
    I think it really depends on your time frame. A retiree who was only in the SP500 in 2000 would have had to wait almost 13 years before his account value returned to that original level and stayed there. Pretty hard to take if you needed to sell to pay the rent.

    Value and small caps did very well however.

  • Observant1
    edited February 13
    I'm not concerned by the fact that 33% of the S&P 500 is allocated towards seven stocks.
    The seven companies, however, share similar economic exposures which increases risk.
    Current market expectations for these businesses are very high and possibly unrealistic.
    Significant S&P 500 declines could occur if expectations are not met.
  • DrVenture
    edited February 13
    My strategy has been the same for several decades. My equity exposure has come down a lot in the last few years as I approach retirement. But my overall equity strategy has remained the same. I anchor my equity portfolio with the S&P and then enhance returns by owning sector funds that are doing well at any given time (growth, value, small, mid, INTL, tech, healthcare, etc). I also have approximately 11-12% of my portfolio dedicated to individual stocks, which I tend to buy/hold, and they lean toward value/DJIA. These are often opportunistic buys, many were acquired during market routs, like Dotcom, GFC or covid. A few I bought when I was first starting out and used DRIPs (WMT, HD, ALL, T).

    When any sector starts to revert to mean, I sell and move to wherever the momentum currently is. In the last several years I sold value, healthcare, small, mid, INTL and a few individual stocks that were underperforming. In the last twelve months, I started selling growth funds, as their results began to lag the S&P. I have since been acquiring value, INTL, small & mid.

    My main mechanism to limit risk is to shift allocation from equity to FI. This is particularly effective in this falling rate environment. If I got really concerned I would move more towards FI and add to cash. Then I would await an opportunity to buy when "there was blood in the streets". I am not there yet.

    I am looking hard at certain FI to beat equities in 2026. Some already is. Some did that in 2025. Some came very close. There have been times that FI was not a lucrative safe haven. Right now it looks pretty enticing. My biggest holdup is that I can only invest 50% of my largest portfolio (401K) in a SDB. This limits my options, particularly with CEFs and bond OEFs.

    I may have veered OT a bit here. But, I think it all is still relevant to the overall topic: risk.

    The more I think about it, my vanilla bond fund, in my 401K, is beating both the large index and all-cap index right now, 6 weeks into 2026! Hmmm.
  • Observant1
    @DrVenture,

    You appear to have a well-thought out plan.
    If you don't mind me asking, what signals are used to determine
    when a sector reverts to mean and where momentum is heading?
  • DrVenture
    For me, it is not complicated, When a fund I hold starts underperforming the S&P for several months, I am watching it. If that continues for 6 months, I either find a substitute or roll it into the S&P index funds that I hold. Performance (all things equal) is my indicator of momentum. Very seat-of-the pants.

    I stay aware of risk-attributes, but I believe they are not (or far less) relevant when the momentum is there. Like with bond funds right now. Riskier funds are performing very nicely. Or EM INTL, the risk is still there, but the momentum is undeniable, as evidenced by performance.

    I am not a chartist. As for full market meltdowns, no avoiding them IMO. My best investing strength is a high risk tolerance. I tend to buy when others are fleeing. I did significant buying in March/April 2020, for instance. Most everyone else seemed frozen in place, or even selling.
  • Observant1
    Thanks, DrVenture.
    Equity correlations often go to "1" during market meltdowns regardless of size, style, or region.
    Being "greedy" when others are fearful is an excellent trait to have!
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