Is the S&P 500 Really Diversified?

In this episode of Financial Sentiments, Nick Haberling, CFP®, discusses the hidden concentration inside the S&P 500 and why investors may not be as diversified as they think.

The S&P 500 is often described as a broad basket of 500 of America’s largest companies, but the index is weighted by market capitalization. That means the largest companies can have an outsized impact on performance. This episode explains what that means, why the Magnificent 7 have mattered so much in recent years, and how investors should think about diversification beyond simply owning “the market.”

Read the original article here:
https://financialsentiments.com/blog/2026/5/27/the-hidden-concentration-inside-the-sampp-500

Have a question or want to talk about your financial plan?
Email Nick at nhaberling@hfgtrust.com or book a meeting here:
https://bookings.cloud.microsoft/book/HFGTrustNickHaberling@HFGTrust.com/?ismsaljsauthenabled=true

Transcript

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Imagine you put $100,000 into an SP 500 index fund. How much of that money do you think is riding on just the 10 largest companies in the index? A decade ago, the answer would have been about $20,000, one-fifth of your money in the top 10 names, and the other $80,000 spread across the remaining 490 companies. Today, that top 10 slice is closer to $40,000. 40% of your money concentrated in 10 companies. So if you're invested only in the SP 500, that means roughly 40% of your wealth is sitting in 10 stocks. Does that feel very diversified to you? It's one of the most common conversations I've had with clients over the past year. And in this podcast, we explore the investment in planning decisions that actually simplify life, cutting through the noise to focus on what truly matters. In today's episode, I want to talk about market concentration, why so many people feel uneasy about it, and why the solution might be simpler than you'd expect it. And here's a preview of where we're headed. My concern with the SP 500 has nothing to do with whether AI is a bubble or whether concentration leads to bad returns over a five-year period of time. It's something much more fundamental. The S P 500 was never the whole market to begin with. So let me explain. People have understood concentration risk for a very long time. Don't put all your eggs in one basket is about as old as advice gets. But it wasn't until the 20th century that we started putting real mathematics behind that intuition, actually measuring concentration so that no single investment could derail an entire portfolio. It started with an economist named Harry Markowitz. He made a deceptively simple observation. Different investments move differently. They have different levels of volatility. So when you combine them, the basket as a whole can be less volatile than any single investment inside it. Then William Sharp and others took it a step further by splitting risk into two types. The first is what they called unsystematic risk. That's the risk tied to any one individual company. So think of the shareholders who watched General Electric destroy an enormous amount of value over the past 25 years. That's company specific risk. The second type is systematic risk, the risk of the market as a whole. And here's the key insight because individual stocks move in different directions, you can diversify away that company specific risk. What you're left with is market risk, the kind of risk you simply can't diversify away. So the real takeaway is this diversification is not just owning a lot of things, it's owning enough different sources of return that no single company, no single sector, and no single country dominates your outcome. So let's come back to that uneasy feeling about the S P 500. If you're worried about concentration, what you're really worried about is this a handful of giant companies stumble and your financial plan takes a hit. Now there are two things I want you to sit with here. First is that you need stocks. If you want to earn the stock market's historical return of roughly 8 to 10% per year, you have to accept some level of risk. That's just the price of admission. A rational investor has to accept market risk. But, and this is the important part, you do not have to accept unnecessary company-specific concentration risk on top of it. And second, here's the good news. If the thing keeping you up at night is how big those top 10 companies have become, the S P 500 is not the portfolio you should be measuring yourself against in the first place. Far more of that concentration can be diversified away than most people realize. So let me tell you what that looks like in actual numbers, because I think it's pretty striking. The SP 500 gets quoted constantly on TV, so it feels like the market. But it shouldn't be our starting point when we design a truly diversified portfolio. For one, the SP 500 doesn't even cover the entire U.S. stock market. If we simply broaden our definition to include medium and small US companies, the weight of those top 10 names dropped from about 40% to 36%. Now that's not a huge change, but it's a start. The bigger move is going global. The US has the largest weighting of public companies in the world, but we still only make up about 62% of the world's total market value. There are thousands of other companies out there that make up the true global market. And when you bring those thousands of companies into the picture, the top 10 stocks in the US fall from 40% of your portfolio all the way down to about 22%. And we can go ahead and take it even one more step. Everything I've described so far assumes you're invested 100% in stocks. That makes sense for a young investor with a long runway, but as we get closer to retirement, we typically start shifting some money into bonds. Let's take a look at a retirement portfolio that's 60% stocks and 40% bonds, but built with a global view of the stock market. In that portfolio, the 10 largest companies in the S P 500 make up just 13% of the total value. So let's watch that number travel from 40% down to 36%, down to 22%, down to 13%. And we did all that without making a single prediction about the future. We just expanded our definition of what the market actually is. So here's the big picture I want to leave you with. If you're only invested in the SP 500 and something about it just doesn't feel diversified, your intuition may have been telling you something important all along. The good news is that the fix doesn't require predicting the future. By going back to the fundamentals and simply expanding our definition of the market to include companies all around the world, we can meaningfully reduce how much any single company or sector can affect your portfolio. Now, before we end, I want to be clear about what this is and isn't. Diversifying this way is not a bet that today's largest companies are going to fail or underperform. It's the opposite of prediction. It's humility, an honest acknowledgement that none of us truly knows which companies, which sectors, or which countries will lead in the years to come. If you'd like to explore whether your portfolio is invested with diversification in mind, you can reach out to me directly by email. The address is in the show notes, or if you'd prefer, you can schedule an introductory meeting at your convenience using the calendar link, also in the show notes. Thanks for listening.

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This podcast is for informational and educational purposes only and should not be considered financial, investment, tax, or legal advice. Opinions expressed are the representative's own and may change over time. Investing involves risk, including the potential loss of principal. Before making any decisions, please consult with your own financial, tax, or legal advisor. This podcast is produced by a representative of HFG Trust, a Washington state chartered trust company.