The S&P 500 is often used to assess portfolio performance. What might be less familiar is how this Index is calculated- it’s based on market cap, meaning larger companies like Apple, Microsoft, and Nvidia have a greater influence on the index’s movements.
Recently, the size of these giants compared to smaller companies in the Index has reached unprecedented levels. This situation, known as concentration risk, means that the performance of just the top few stocks has a dramatic effect on the entire Index. For instance, even if most companies perform well, a downturn in these few large stocks can significantly impact the overall Index.
Historically, similar peaks in market cap disparity, like those in 1987, 2000, 2008, and 2020, have often been precursors to significant market downturns, as seen below. Our goal is to maintain appropriate exposure to different market segments to safeguard your investments during times of high market concentration.
Market Cap Concentration Cautions
Market Cap Concentration chart represents top 75th percentile of securities in the S&P 500 Index
- We believe the preservation of capital is key to consistent, long-term investment success.
- Our investment approach is grounded in economic theory and backed by quantitative analysis.
- Managing drawdown risk is a pillar from which we build our portfolios.
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