Something interesting happened in the first quarter of 2025. The phone calls stopped. Not all calls, but a particular kind: the ones that began, "Why don't I just put everything in the S&P 500 and call it a day?" Those calls, so familiar over the past decade, have gone quiet. In their place, a new conversation has begun, one about concentration risk, about whether the great technology run might finally be showing its age. We find this music to our ears.
Let’s start with the numbers. The S&P 500 declined 4.4% in the quarter. Meanwhile, the rest of the world got on with the business of making money:
For much of the past decade, these diversified positions were the source of polite but persistent frustration. The S&P 500 trounced every other asset class in sight, and we heard about it. Regularly. Now, in just one quarter, it’s trailing virtually everything else we own. We don’t say this to gloat. We say it because this quarter is a useful reminder of why we build portfolios the way we do.
We’d respectfully add that we know enough to know that nobody knows enough.
This seems like an apt moment to be transparent about something we’ve never exactly hidden, but perhaps never stated plainly enough: for the vast majority of our clients, and for our own money, the S&P 500 represents only a modest slice of the portfolio. Some will conclude this makes us geniuses. Others, idiots. We’d simply call it intentional.
The S&P 500 is simply a list of the 500 largest U.S. companies, weighted by market capitalization. This sounds sensible, and in many ways it is. But the mechanics create a subtle and underappreciated problem: the index automatically puts more money into whichever stocks have gotten most expensive. The higher the price climbs, the larger the allocation. In a technology bubble, the index loads up on technology. After the Magnificent Seven, Apple, Microsoft, NVIDIA, Amazon, Meta, Alphabet, and Tesla, enjoyed an extraordinary run, the S&P 500 obligingly filled its pockets with them.
The result is a concentration that would surprise most investors who believe they own “500 stocks.” According to J.P. Morgan’s Guide to the Markets, the top ten holdings currently represent roughly 38% of the entire index.
Forty percent of your money going into ten stocks is not diversification. It’s a highly concentrated bet dressed in index clothing.
The second limitation is geography. The S&P 500 is entirely U.S.-based, excluding every international company by definition. That’s been a fine policy for the past fifteen years. It was a costly one in the 1970s and 1980s, a full twenty years during which a ⁄1,000 investment in the S&P 500 grew to roughly ⁄8,900, while the same ⁄1,000 in international stocks grew to nearly ⁄17,000. Two decades is a long time to wait for a rebound.
Third, the index excludes all small companies. This matters because smaller stocks have outperformed since 1926, averaging 11.6% annually versus 10.5% for large caps (Fama-French US Small Cap Research Index). Over long periods, that 1.1% gap compounds into a real difference. The S&P 500 simply misses it entirely.
Our preference is for funds that own essentially all of the stocks, with a modest tilt toward those most likely to reward patient investors: smaller companies, less expensive companies, and more profitable companies. This isn’t a market-timing call. It’s a structural one.
The most sobering argument for diversification isn’t a single bad quarter. It’s the history of prolonged stagnation. After accounting for inflation, the S&P 500 has delivered precisely nothing for remarkably long stretches.
A retirement that begins during one of these periods, with withdrawals being taken throughout, faces a genuine arithmetic problem. No single index, however well-constructed, should bear the full weight of a lifetime of savings. The antidote is straightforward, if unglamorous: own many things, in many places, of many sizes.
We can’t predict when the winds shift. We never could. But we can build portfolios that are positioned to weather them when they do, where no single market, sector, or style of investing holds more of our future than is wise. One quarter doesn’t prove a thesis. But it does remind us why we hold one.
As always, we’re grateful for your trust and welcome any questions.
-A note from Bjorn Amundson, CFP®
This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing contained in the material constitutes a recommendation for purchase or sale of any security, investment advisory services or tax advice. The information and opinions expressed in the linked articles are from third parties, and while they are deemed reliable, we cannot guarantee their accuracy.