Beware the Concentration Risk in Your 401(k)

Personal FinanceComments

While stocks are up big this year, gains are concentrated in a handful of large tech companies. This amplifies risks in broad market funds like 401(k)s.

Beware the Concentration Risk in Your 401(k)SourceMoneyGuru-

Concentrated Gains in 2023

Over 80% of S&P 500 returns this year come from just 10 stocks, led by Apple, NVIDIA, Microsoft, Alphabet, and Amazon. Such concentration means 401(k)s heavily allocated to the S&P 500 have hidden risks.SourceMoneyGuru-

Implications for Portfolios

Concentration in a few stocks increases vulnerability to sector-specific risks. Issues affecting mega-cap tech companies disproportionately sway S&P 500 performance and linked portfolios. There is also less diversification than many realize.SourceMoneyGuru-

The Case for Sector Rotation

Compare the S&P 500, weighted by market-cap, to the equal-weight version. In 2023 the cap-weighted S&P is up 19% vs 8% for the equal-weight. As leadership rotates between sectors over time, adjusting allocations may reduce concentration issues.SourceMoneyGuru-

Consider the Role of Other Assets

While tech stocks have shone in 2023, reassessing other assets like bonds, gold, and real estate may provide balance. These oft have low correlation to equities, offering diversification. Historical data also backs seasonality and the presidential cycle.SourceMoneyGuru-

Is a New Commodities Supercycle Coming?

Some analysts foresee a decade-long commodities bull market emerging. Rising ESG costs, electrification policies, developing market demand, and eventual loose monetary policy could drive commodity prices higher post-2023.SourceMoneyGuru-

The Takeaway

Concentration and lack of diversification raise risks for passive S&P 500 investors. Strategies like sector rotation, evaluating assets besides stocks, and focusing on in-demand commodities may help mitigate the lurking risks.SourceMoneyGuru- SourceMoneyGuru-




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