March 3, 2025
Surely, you’ve heard about “not putting all your eggs in one basket.” This overused cliche stresses the importance of diversification (spreading out risk across a group of investable assets).
For stocks, advisors often suggest a basket of 20-30 stocks to achieve diversification. So, many folks think owning a mutual fund tracking a broad index like the S&P 500 makes them diversified.
But that huge basket of stocks isn’t as diversified as you think.
Yes, the index’s constituent companies and weightings have changed over the years. Before 2020, the top 10 constituents accounted for 17%-27% of the index’s total weighting.
But that’s ballooned.
By mid-2023, the top 10 stocks were about 30% of the overall weighting. Today it’s about 36%.
That’s a huge concentration for the S&P 500 on its 10 largest companies, and it means funds tracking the index are massively undiversified. While they hold all 500 companies, more than a third of the capital is allocated to just 10 companies.
When those companies drive most of the overall index performance, it can be worrisome.
For example, in 2007 the top 10 companies were responsible for nearly 79% of the performance, but the index gained less than 4% that year. In 2020, when the top 10 companies were responsible for only 59% of the performance, the index rose 16%.
The takeaway is clear: the S&P 500 is not diversified. If you have all your eggs in that basket, your investments are around the highest levels of concentration in decades.