Your "Safe" Index Fund Might Be Riskier Than You Think

You check your investment account and see steady growth. The S&P 500 keeps hitting new highs. Everything looks great.

But here's what most investors don't realize: that supposedly diversified index fund might be carrying more risk right now than at any point in the past 50 years.

Right now, just 10 companies make up 40% of the entire S&P 500 index.¹ Think about that. You own 500 companies, but your returns depend heavily on what happens to just 10 of them.

To put this in perspective, during the dot-com bubble peak in 2000, the top 10 companies only represented 29% of the index.² We're now more concentrated than we were right before that bubble burst and the market fell nearly 50%.

Nvidia alone represents almost 8% of the S&P 500, the highest single-stock weighting in the index's history. Add Microsoft and Apple, and those three companies control 21% of the index.³

When you invest in an S&P 500 index fund, you're not getting equal exposure to 500 companies. You're making a concentrated bet on a handful of technology giants.

Here's the risk: these companies are trading at expensive valuations. The S&P 500's current price compared to expected earnings sits at 23, matching levels we haven't seen since early 2021. The only times it's been higher were during the 2020 pandemic panic and right before the dot-com crash, when it peaked at 26.2.⁴

High concentration plus high prices equals higher risk.

Many investors see the S&P 500's strong recent performance and assume it will continue.

This creates a dangerous mindset. When everything is going up, we stop thinking about risk. We chase recent returns and ignore warning signs.

Remember earlier this year? The S&P 500 dropped 19% between February and April.⁵ The temporary decline shook many investors. The question is: did you learn anything from how that felt?

If you were uncomfortable during that drop, your portfolio might not match your actual risk tolerance, regardless of what the recent gains suggest.

The dot-com crash provides a clear lesson. From March 2000 to October 2002, the S&P 500 fell 49%. Even with dividends reinvested, investors lost 47% of their money.

It took years to recover. Investors who stayed the course eventually came back, but many panicked and sold at the worst possible time, locking in permanent losses.

Today's market setup resembles that period in concerning ways: high concentration, elevated valuations, and widespread enthusiasm about transformative technology (artificial intelligence now, the internet then).

The difference? Today's concentration is even higher.

Here's what often gets lost in the pursuit of returns: investing isn't about maximizing gains. It's about reaching your specific financial goals with an acceptable level of risk.

If you're saving for retirement 20 years away, you can handle more risk. If you need money in five years for a house down payment, you can't afford a 50% drop.

Your portfolio should reflect:

Your timeline. When do you need this money? The shorter your horizon, the less risk you should take.

Your goals. Are you building wealth, preserving capital, or generating income? Different goals require different strategies.

Your ability to stay calm. Can you watch your account drop 30% without panicking? If not, you need less risk, regardless of what the market has done lately.

Diversification means more than owning 500 stocks if those stocks are heavily weighted toward the same companies and sectors.

Real diversification includes:

International stocks. Other countries' markets don't move in lockstep with the U.S.

Small and mid-sized companies. These represent opportunities beyond the mega-cap tech giants.

Bonds and fixed income. Historically, when stocks drop, bonds often provide stability. Research shows that during periods of high stock valuations like today, a traditional 60% stock/40% bond portfolio has typically outperformed a 100% stock portfolio over the following 10 years. In fact, when stock valuations reach current extreme levels, a balanced 60/40 portfolio has beaten the S&P 500 over the next decade 90% of the time.⁶ The expected outperformance isn't small either: historically, it's been about 2.1% per year.⁷

Different investment approaches. Equal-weight indexes, value-focused strategies, and dividend-growth portfolios can reduce concentration risk while still providing equity exposure.

You don't need to abandon the S&P 500 completely. For long-term investors, it remains a solid core holding. But "core holding" is different from "entire portfolio."

Consider these steps:

Assess your actual risk tolerance. Think back to how you felt during market drops. That emotional reaction matters more than any risk questionnaire.

Review your timeline and goals. Has anything changed in your life that should change your investment strategy?

Look at your concentration. If the S&P 500 represents most of your portfolio, you're heavily exposed to 10 companies, whether you intended that or not.

Build in cushions. If near-term goals exist, protect that money from stock market swings. If retirement is approaching, gradually reduce equity exposure.

Don't chase performance. Last year's winners often become this year's disappointments. The hottest investments usually carry the highest risk.

The biggest risk isn't market crashes. Markets have always recovered eventually. The real danger is making investment decisions based on recent performance instead of your actual needs, then panicking and selling when markets turn.

A well-diversified portfolio matched to your goals might not generate the exciting returns of a concentrated index during boom times. But it will help you sleep at night during downturns and keep you on track to reach your financial goals.

That's what investing should be about: reaching your destination, not just maximizing speed along the way.

Right now, with concentration and valuations at extreme levels, it's worth asking yourself: does my portfolio reflect where the market has been, or where I need to go?

The answer to that question matters more than any index reaching a new high.

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed.All investments involve risk, including the potential loss of principal. Leveraged ETFs and other complex investment vehicles may not be suitable for all investors and should only be used with a full understanding of their risks. Asset class performance varies over time, and diversification does not ensure a profit or protect against a loss. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed. Mutual funds and other securities are offered through De Thomas Wealth Management, a mutual fund dealer registered in each province in which it conducts business and a member of the Canadian Investment Regulatory Organization (CIRO).