In other words, when the largest trees fall, everyone will feel the forest shake.
This isn’t just a problem for investors in S&P 500 funds, which are limited to the largest stocks on the market. The problem goes far beyond that. According to the classic definition, the entire US stock market is now not diversified. This is true whether you use the Dow Jones US Total Stock Market to define the stock market, which Fidelity does with its Fidelity Total Stock Market Index Fund, or whether you measure the market using the CRSP US Total Market Index, as Vanguard does for its Vanguard Total Stock Market Index Fund.
The stock market itself could solve the non-diversification dilemma. The market becomes diversified again when the largest stocks lose value faster than the smaller stocks. But if you hold broad, no longer diversified funds when the market corrects, it will hurt you.
Protect yourself
So what does this mean for normal people? In short, I think it is inevitable for investors that the entire U.S. stock market, at least in this regard, is no longer as safe as it has been for more than 50 years.
Note that I’m only talking about market concentration here, which is largely caused by the technology boom related to AI. Other, bigger headline issues facing the country and the world are also impacting markets. These include the unrest in Minnesota sparked by violent immigration crackdowns, the Trump administration’s pressure on the Federal Reserve, its use of tariffs to punish former friends, its threats to invade Greenland, and the capture of the former president of Venezuela. I will return to the market impact of such issues in future columns.
Market concentration has never reached such extreme levels in my adult life. However, this was common practice until 1967, according to an analysis by the Vanguard Investment Advisory Research Center using historical data from the Center for Research in Security Prices. The study went back to 1925, and at the beginning of each year from 1925 to 1967, the five largest stocks – companies such as AT&T, US Steel, General Motors and Standard Oil of New Jersey – accounted for at least 25 percent of the value of the entire U.S. stock market. I don’t want to go back to the worst aspects of that long era, which included the Great Depression. Stock returns have been volatile.