The S&P 500 Isn't As Diversified As You Think
2025 marked the third straight year of double-digit growth for U.S. stocks. Exciting, right? Much of the growth comes from enthusiasm around artificial intelligence and a handful of massive tech companies. Plenty of investors have benefits. But there's a downside most people aren't talking about. And its really important to understand, especially if you're nearing or already enjoying retirement.
Why This Matters for Your Retirement
You might have seen a recent New York Times piece making the rounds in investing circles. The message: the way you think about "diversification" in your portfolio may be out of date. And if you're relying blindly on an S&P 500 index fund for broad diversification, you could be taking on more concentration risk than you realize.
What "Diversified" Actually Means (And Why Your Fund May Not Qualify Anymore)
We’ve all heard the advice: Don’t put all your eggs in one basket. That’s what diversification is supposed to do for investors. When you invest broadly in a diversified fund you spread your money across lots of companies, so if one company fails, the others keep you afloat.
Traditionally, investing in the S&P 500 has been viewed as a broadly diversified strategy. But in today’s market, the index is far more concentrated than many investors realize, meaning your “diversified” fund may not be as balanced as it appears.
Here is what I mean:
The SEC says a fund is “diversified” if no single stock makes up more than 5% of the total, and all stocks over 5% don’t add up to more than 25%.
As of December 31, 2025, the S&P 500’s four top stocks tell a different story:
- Nvidia: 7.8%
- Apple: 6.9%
- Microsoft: 6.2%
- Alphabet (Google): 5.6%
Combined, that’s 26% of the whole S&P 500 — which means the S&P 500 crosses the line from "diversified" to “nondiversified.”
Fund managers like Fidelity, Vanguard, and BlackRock have updated their disclosures to reflect this shift.
One reason this concentration has developed is how the S&P 500 is built. The index is market-cap weighted, meaning the largest companies make up the biggest portion of the index.
Over the past decade, a small group of very large companies, especially technology companies, has grown much faster than the rest of the market. As their stock prices increased, their share of the index grew.
In other words, the concentration isn’t intentional. It’s simply a reflection of how large and successful a handful of companies have become relative to the rest of the market.
It's Not Just the S&P 500. Its the Whole U.S. Market
You might think investing in a total market fund is an easy solution. However, the same handful of large technology companies that dominate the S&P 500 also dominate the entire U.S. stock market. Whether you’re investing in the S&P 500 or a total market index, a significant portion of your investment is still tied to those same companies.
What does this mean?
If companies like Nvidia, Apple, Microsoft, or Google were to face a meaningful setback — whether from an AI slowdown, new regulations, or increased global competition — funds that track the broad U.S. market could feel the impact. Its a good reminder that even “diversified” U.S. index funds can still have meaningful exposure to a relatively small number of companies.
What You Can Do About It
Long-term, broadly diversified, low-cost investing remains a sound approach for most investors. But it may be a good time to review what’s actually inside your portfolio.
Consider international exposure. Many overseas markets are less concentrated in the same large U.S. technology companies. Allocating some of your stock or equity to international stocks can improve diversification.
Review your asset allocation. Investors who are approaching or already in retirement may benefit from holding an allocation to bonds, which can help reduce the impact of stock volatility.
Look at your underlying holdings. Owning several funds does not necessarily mean you are well diversified. Many funds hold the same large companies. Reviewing the top holdings in your portfolio can help you understand whether you may be more concentrated than you realized.
Bottom Line
You don’t need to overhaul everything overnight. But given the tech concentration in today's market, it’s more important than ever to review your portfolio’s allocation, global exposure, and actual holdings. Make sure you’re not betting your nest egg on just a few companies, especially if retirement is on the horizon.
If you’d like personalized guidance on designing your retirement portfolio, Sensible Portfolios is ready to help you take the next step.
Sources:
- Goldman Sachs Research “Is the S&P 500 too concentrated?”
https://www.goldmansachs.com/insights/articles/is-the-sp-too-concentrated - NY Times. "Your 'Safe' Stock Funds May Be Riskier Than You Think"
https://www.nytimes.com/2026/01/30/business/stock-market-concentration-risk.html?unlocked_article_code=1.JFA.2NAA.iBlj0PHGg_xB&smid=url-share
