Many investors in target-date funds or broad index funds assume they’re well-diversified. The structure of today’s market suggests it’s worth a closer look — particularly for those approaching or already in retirement.
For decades, target-date retirement funds and broad-market index funds have been an excellent foundation for investors. They’re low-cost, tax-efficient, and have helped millions of people build wealth while avoiding the temptation to time the market.
But as markets evolve, so do the risks. Today’s market is heavily influenced by a small number of mega-cap technology companies, creating a level of concentration not seen in decades. That means many investors who believe they’re broadly diversified may actually have a much larger portion of their retirement savings tied to just a handful of stocks than they realize.
Diversification Isn’t What It Used to Be
Most target-date funds invest their U.S. stock allocation in broad market index funds. Likewise, many investors own S&P 500 or Total Stock Market index funds in their retirement accounts.
On the surface, these investments appear highly diversified because they own hundreds—or even thousands—of companies.
The catch is that most of these funds are market-cap weighted.
Rather than investing equally across every company in the index, market-cap weighted funds allocate more money to the companies with the largest market values. As those companies grow, they become an even larger percentage of the portfolio.
This isn’t just a target-date fund issue. Most broad U.S. stock index funds—including many S&P 500 and Total Stock Market funds—use the same market-cap weighting methodology, resulting in similar concentrations in today’s largest companies.
Today, that has created one of the highest levels of market concentration in modern history.
Market Concentration Has Changed Dramatically
The seven largest companies in the S&P 500—Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla—now account for roughly one-third of the entire index. Put another way, nearly $1 out of every $3 invested in a traditional S&P 500 index fund is invested in just seven companies.
The concentration becomes even more striking when you look at the ten largest companies, which now represent nearly 40% of the index.
While these companies span several sectors, including Information Technology, Communication Services, and Consumer Discretionary, they share many of the same characteristics. They are mega-cap growth companies whose performance has largely been driven by similar themes, including artificial intelligence, cloud computing, and digital advertising.
This isn’t a flaw in index investing. It’s simply how market-cap weighted indexes are designed to work. But it does mean many investors have more exposure to a relatively small group of companies than they may realize.
Why This Matters Before and During Retirement
This isn’t an argument that these companies are poor investments. Quite the opposite, they’ve been extraordinary businesses and have driven much of the market’s performance over the past decade.
The question isn’t whether they’re good companies.
The question is whether having such a significant portion of your retirement savings tied to a relatively small group of stocks is appropriate before retirement—or once you’re retired and are relying on those assets to help support your lifestyle.
Whether you’re five years from retirement or already taking withdrawals from your portfolio, periods of elevated market concentration deserve attention. A portfolio that appears broadly diversified on paper may, in reality, have a significant portion of its stock allocation tied to the performance of a relatively small number of companies.
History reminds us that market leadership changes. Different sectors, investment styles, and individual companies take turns outperforming. Periods of market concentration eventually give way to broader market participation, which is one of the reasons diversification remains such an important part of long-term investing.
How We’ve Been Positioning Client Portfolios
One of the reasons we’ve been discussing this with clients over the past several years is because we’ve been watching this concentration steadily increase.
Where appropriate, we’ve incorporated equal-weight and other diversification strategies to reduce dependence on just a handful of companies driving portfolio returns. Equal-weight approaches allocate investments more evenly across the companies in an index rather than allowing the largest stocks to dominate simply because their market values have grown the most.
That doesn’t mean eliminating exposure to companies like Apple, Microsoft, or Nvidia. We continue to believe many of these businesses have exceptional long-term prospects.
Instead, it’s about creating a healthier balance. We don’t believe retirement or financial success should depend disproportionately on the performance of seven or ten companies, regardless of how successful they’ve been.
We’ve also continued to diversify portfolios across multiple asset classes, including international stocks, high-quality bonds, municipal bonds, real assets, and other investments that don’t necessarily move in lockstep with today’s largest mega-cap growth companies.
Our goal isn’t to predict which sector, or investment style will outperform next year.
Our goal is to build portfolios that are resilient across a variety of market environments while helping clients stay invested through changing markets.
Diversification Is Only One Piece of the Plan
Investment management is an important part of retirement planning, but it’s only one piece of the puzzle.
Whether you’re preparing for retirement or already there, we regularly ask questions such as:
• Is your portfolio taking an appropriate amount of risk based on where you are in retirement—or how close you are to it?
• Where will your retirement income come from during the first several years after you stop working?
• Do you have investments that may help cushion periods of market volatility?
• Is your portfolio diversified beyond today’s largest companies and market leaders?
• Does your investment strategy still align with your retirement goals, tax situation, and income needs?
Sometimes the answer is that no changes are needed.
Other times, modest adjustments can improve diversification while still allowing investors to participate in long-term market growth.
The Bottom Line
Target-date funds and market-cap weighted index funds continue to play an important role in many well-diversified portfolios.
At the same time, today’s market is far more concentrated than it was a decade ago. That doesn’t mean investors should abandon index investing, but it does mean it’s worth understanding exactly what you own and whether your portfolio still reflects your goals, time horizon, and comfort with risk.
At Tidewater, we don’t build portfolios based solely on what’s worked best over the last five years. We build portfolios designed to help clients achieve their goals over the next twenty.
Whether retirement is still a few years away or you’re already enjoying it, periodically reviewing your investment strategy is one of the best ways to ensure your portfolio continues to support the life you’ve worked so hard to build.