If you’re a fan of stock index funds, you’ll likely want to stay on top of this
“Even if you have been doing everything right and diversifying your investments as the textbooks suggest, you may be taking greater risk than you realize,” says New York Times finance and economics columnist Jeff Sommer.
Tech giants have been driving stock returns, and the market has become so highly concentrated that even the most comprehensive U.S. stock index funds no longer are well diversified.
“In fact,” Sommer says, “by a strict legal definition, they now are not diversified at all. If you believed that by buying an index fund that mirrored the entire stock market you were being protected by true diversification, it’s time to re-evaluate this crucial assumption.”
The situation has changed for the first time since the beginning of widely available index funds in the 1970s, he says.
On Dec. 31, 2025, the combined total value of Nvidia; Apple; Microsoft; and Alphabet, the holding company for Google, were equal to more than 26 percent of the S&P 500.
And the entire U.S. stock market is now nondiversified, using the classic definition, Sommer says.
“The stock market itself may fix the nondiversification dilemma,” Sommer says. “The market will become diversified again if the biggest stocks decline more rapidly in value than the smaller stocks. But if you’re holding broad, no-longer-diversified funds when the market corrects itself, you will be hurt.”
“For reducing risk, it’s always been wise to also hold cash and bonds, and to make sure that both your stock and bond investments include broad international allocations as well,” Sommer says. “Now, given the concentration in the U.S. market, it’s even more prudent to do so.”
Another Times article you may find of interest: “Sell America is the new trade on Wall Street.”
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