As Morningstar noted recently, the stock market is “ultra-concentrated” and could become more so as mega-cap tech stocks boom and dominate the S&P 500.
Dominic Pappalardo, chief multi-asset strategist for Morningstar Investment Management’s Morningstar Wealth, noted in a conversation on the main Morningstar website that the index’s top 10 stocks by weight comprise about 40% of the S&P 500’s market capitalization.
That concentration level is “historically extreme” and may not stop there given investor demand for tech and arftificial intelligence stocks, Pappalardo said in the piece.
ThinkAdvisor asked advisors this week whether they’re concerned that many client portfolios are overconcentrated in the tech-dominated S&P 500 and what steps they’re taking to add diversification.
Brandon Clouse, director of physician services, senior financial planner, Prism Planning Partners, said he wasn’t concerned about overconcentration because his firm has accounted for asset allocation and diversification, but is concerned for younger investors, especially doctors in their 20s through 40s.
“Most have only known bull markets, and their careers have coincided with tech’s dominance. Many follow bloggers, podcasters and influencers who champion simple index strategies, and I regularly see portfolios that are 90-100% S&P 500 funds,” Clouse said.
“That approach has worked lately, but it ignores diversification and the ‘Lost Decade’ of 2000-2009, when the index was negative over 10 years. My biggest worry isn’t the index or tech sector themselves, but overconfidence in these younger professionals. Investors who’ve never experienced prolonged downturns risk mistaking recent performance for proof of a flawless strategy, when in reality, it’s a narrow bet on one sector and one country’s fortunes,” he said.
See the accompanying gallery for 16 strategies that advisors are employing to keep client portfolios diversified.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.