Your S&P 500 tracker isn’t as diversified as you think
A prospect told me recently they'd ‘sorted’ their pension and ISA investments; invested it all in the S&P 500*. Low cost, 500 companies, what’s not to like?
Well, at time of writing, the top 10 holdings in the S&P 500 represent over one third of the total index. Nvidia, Apple and Microsoft are each individually above 5%.
All this means, investing in the S&P 500 isn’t as diversified as you might think.
*S&P 500 is an index which broadly includes the 500 largest companies listed in the USA
| They're Not Different Bets
Look closer and most of the top ten is really one bet, in different ways.
Microsoft, Amazon, Alphabet and Meta are all leaning on the same story: AI infrastructure spend pays off. Nvidia's growth depends on chip demand from that same spend. Apple is tied to the broader tech complex. Even Tesla trades partly on the same automation and AI optionality
Hold the S&P 500 index, and "diversified" starts to mean something narrower than it sounds.
| What the Dot Com Bubble Showed us
I'm not calling a crash. Nobody can time this, and pulling out of the market on a hunch is not sensible… at all.
But the dot-com period taught a lesson that a genuinely good company, real profits, dominant position, could still be a poor investment if the price already assumed years of growth that hadn't happened yet.
Cisco was one of the best businesses of the internet build-out, and its shares still fell roughly 80% and took decades to recover.
Today's AI-exposed giants that appear in the top 10 in the S&P 500 are far more profitable than the telecom names of 2000. But some of the demand between them is circular, chipmakers, cloud providers and AI labs financing each other's growth, which makes the underlying demand harder to read than it looks on the surface.
| What This Means for You
Worth asking yourself:
What's actually inside your ISA, pension or general investment account right now?
How much of it is really one AI-spend bet, wearing different logos?
Are you comfortable with that level of concentration, now you can see it?
None of this is a call to sell up or panic. It's a reason to know what you actually own. If you want a second pair of eyes on what's really sitting inside your portfolio, drop me a message and I'll take a look.
Risk warnings
Investments do not give the same capital security as cash deposits. Investments carry risks. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Tax rates may change in the future.
The above article is not financial advice. If you need financial advice, please see an independent financial adviser (like us!).
