Eric Sepanek
SBC Founder
Eric Sepanek is the founder of Scottsdale Bullion & Coin, established in 2011. With extensive experience in the precious metals industry, he is dedicated to educating Americans on the wealth preservation power of gold and silver.
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For decades, investors operated under the impression that owning a total market fund, S&P 500 index fund, or target-date fund meant their portfolios were broadly diversified, at least in equities.
While these funds expose investors to hundreds and sometimes even thousands of companies, the variety is largely illusory. In reality, these funds are often heavily concentrated in a handful of leading businesses.
This accumulation is a byproduct of how market funds work. Companies are weighted by their market capitalization, meaning larger businesses represent a proportionally larger share of the index — and of every dollar an investor contributes.
The rapid rise of artificial intelligence and the resulting investment frenzy accelerated this concentration, leaving many investors feeling overexposed amid temporary market euphoria.
Millions of Americans May Be More Exposed Than They Realize
Alarmingly, tens of millions of Americans are more exposed to this hyper-concentration than they may realize. According to a Gallup News poll, nearly six out of 10 American adults have a retirement savings portfolio, such as an individual retirement account (IRA), 401(k), or 403(b).
According to the Investment Company Institute, broad index funds account for more than half of assets in long-term mutual funds and ETFs, up from just 19% at the end of 2010. Additionally, Vanguard reports that approximately 60% of target-date funds—designed to reach maturity around a predetermined retirement date—are index-based.
Why Owning 500 Stocks Doesn’t Always Mean You’re Diversified
It’s counterintuitive to think a broad market fund with 500 or more companies doesn’t automatically offer optimal diversification. That’s because investors often assume companies are given equal weighting, wherein each business represents an identical share of the fund.
More commonly, index funds use market-cap weighting. Under this model, larger companies with higher valuations represent a proportionally larger percentage of the fund. This weighted division represents their share of the overall market and, as a result, investors’ portfolios.
Each company’s proportional representation in a fund is directly tied to how its market cap compares to the value of other companies in the same index. As companies grow larger, market-cap-weighted indexes automatically allocate a greater share of new investments to them. Periods of strong performance increase their influence within the index over time.
Today’s Market Concentration at a Glance
The S&P 500 may contain 500 companies, but its largest holdings command a disproportionate share of the index. As of mid-2026, its ten largest securities accounted for roughly 40% of its total weight, while the Magnificent Seven alone represented approximately one-third. Concentration is even greater in growth-focused benchmarks. The Nasdaq-100’s ten largest holdings represented about 45% of the index, while the Russell 1000 Growth’s top ten exceeded 54%.
Another measure makes the imbalance even clearer. Bridgeway Capital Management calculated that the S&P 500 had an “effective” stock count of only about 46 at the end of 2024. In other words, although the index contained 500 companies, its weighting was mathematically comparable to an equally weighted portfolio of just 46. That was the lowest effective count in Bridgeway’s 55-year study, surpassing concentration levels associated with the early-1970s Nifty Fifty era and the late-1990s technology bubble.
How AI Supercharged Market Concentration
Every so often, a major technological shift creates a new group of market leaders. Over the past several years, the artificial intelligence boom has raised earnings expectations and valuations for companies involved in semiconductors, cloud computing, data-center infrastructure, software, and digital platforms.
By late 2023, the Magnificent Seven accounted for roughly 28% of the S&P 500’s market value. As their share prices continued climbing, their combined weighting approached one-third of the index by mid-2024. Between 2023 and 2025, the group on average generated half of the S&P 500’s total return, illustrating how a small number of companies increasingly drove overall market performance. These are among the warning signs building beneath the surface of a market that looks healthy on the index level but is increasingly reliant on a handful of names.
Because the S&P 500 is weighted by market capitalization, rising stock prices automatically gave these companies greater influence over the index. Their growth also changed how new retirement contributions were allocated. As their index weights increased, every dollar invested in an S&P 500 fund purchased proportionally more exposure to the same small group of mega-cap companies.
Where Does Your Retirement Contribution Actually Go?
Many retirement savers assume that investing in an S&P 500 index fund spreads every contribution evenly across hundreds of companies. In reality, market-cap weighting means a significant portion of every dollar is automatically directed toward the index’s largest holdings.
The illustration below shows how a hypothetical $100 investment would be allocated using approximate S&P 500 weightings as of mid-2026. Although the index contains 500 companies, roughly one-third of every new investment is concentrated in just the Magnificent Seven, while less than two-thirds is spread across the remaining 493 stocks.
Case Studies: How Market Concentration Can Amplify Losses
Market concentration can magnify both gains and losses. Recent market history illustrates how a relatively small group of heavily weighted companies can significantly influence the performance of millions of retirement portfolios.
2020 COVID Crash
The COVID-19 market panic sent the S&P 500 down nearly 34% from its February high to its March low. Because the index’s largest technology companies carried significant weight, broad-market retirement funds declined sharply alongside them. Apple, Microsoft, Amazon, Alphabet, Meta, and Nvidia all fell between roughly 20% and 40% during the selloff.
2022 Bear Market
The technology-heavy Nasdaq-100 fell 32.4% in 2022, compared with an 18.1% decline for the S&P 500. Many of the market’s largest companies experienced even steeper losses. Meta shares fell approximately 64%, Amazon declined about 50%, Nvidia lost roughly 50%, Alphabet dropped nearly 40%, and Microsoft fell around 28% before recovering.
2024 Technology Pullback
During the summer of 2024, rising interest rates and concerns over stretched AI valuations triggered a correction in technology stocks. The S&P 500 Information Technology sector fell approximately 12% between mid-July and early August, while the Magnificent Seven collectively lost more than $1 trillion in market value over just a few weeks.
These periods of equity concentration underscore how the performance of a small number of companies can determine the returns experienced by millions of retirement investors. As the S&P 500’s 10 largest companies comprise 40% of the index, investors are becoming increasingly concerned about their retirement portfolio’s exposure.
Diversification Means More Than Owning Different Funds
As the highly concentrated nature of the average index fund clearly shows, simply investing through a 401(k) or IRA may not provide sufficient portfolio diversification. Even a truly equal-weighted broad-market fund would still leave you heavily exposed to equities.
Although every stock responds to company-specific factors such as revenue, profits, and demand, broader forces can influence the entire stock market, including inflation, interest rates, and geopolitical turmoil. True diversification means reducing dependence on any single market trajectory. For many investors, that’s where physical gold comes into play.
Why Gold Behaves Differently Than Stocks
When investors buy stock, they’re purchasing an ownership stake in a company whose value depends on factors such as revenue growth, profitability, competitive positioning, and management execution. Stock prices are also influenced by broader business risks, changing consumer demand, technological disruption, and economic slowdowns.
Unlike stocks, gold doesn’t generate earnings, issue dividends, or rely on customers buying products and services. Instead, gold has historically been driven by broader macroeconomic forces, including inflation expectations, interest rates, currency movements, central bank demand, and geopolitical uncertainty.
As a tangible asset with inherent value, gold carries no counterparty risk, meaning its value isn’t dependent upon a third party or financial institution meeting its obligations. It has also served as a recognized store of value for thousands of years, making it one of the world’s oldest and most widely held monetary assets.
Does Gold Actually Improve Diversification?
While no investment performs well in every environment, historical performance consistently suggests that gold optimizes diversification by responding positively to the broad market conditions that tend to weigh on equities. Academic research has found that:
- Gold has generally exhibited a low—or at times even negative—correlation with the S&P 500 over long periods, meaning it has often moved independently of equities.
- The metal has maintained relatively low correlation with U.S. Treasury bonds, providing diversification beyond a traditional 60/40 portfolio.
- According to the World Gold Council, portfolios allocating approximately 2% to 10% to gold have historically produced higher risk-adjusted returns than portfolios without gold. For a deeper look at how the World Gold Council frames gold’s role in a portfolio, its research offers a useful framework for sizing an allocation.
- Historical analysis suggests that modest gold allocations have reduced portfolio drawdowns and overall volatility during many periods of market stress.
- Unlike fiat currencies, whose supply can expand through monetary policy, the global gold supply typically grows by only 1%–2% per year through newly mined production.
- Gold has outperformed the stock market in total returns throughout the 21st century.
Can You Own Gold in a Retirement Account?
Many investors assume retirement accounts can only hold traditional assets such as stocks, bonds, mutual funds, and exchange-traded funds. While that’s true for many employer-sponsored retirement plans, it isn’t the only option available.
Under IRS rules, investors may establish a self-directed IRA that permits certain alternative assets, including qualifying physical precious metals. When funded with IRS-approved gold bullion and administered by an approved custodian, this type of account is commonly referred to as a Gold IRA.
Like traditional and Roth IRAs, gold IRAs offer potential tax advantages depending on the account type and an investor’s individual circumstances. Existing retirement assets may also be eligible for rollover from certain 401(k)s, traditional IRAs, and other qualified retirement accounts without triggering immediate taxes or penalties. If you’re considering rolling a 401(k) into a gold IRA, understanding the funding process step by step can help you avoid common pitfalls.
For investors concerned about growing concentration in traditional retirement portfolios, a gold IRA offers a way to add physical precious metals without sacrificing the tax advantages associated with retirement investing. Whether such an allocation is appropriate depends on an individual’s financial goals, time horizon, risk tolerance, and overall investment strategy.
If you’re eager to learn more about diversifying with gold and silver, claim a FREE copy of our Precious Metals Investment Guide. It covers everything you need to know about optimizing wealth protection with physical metals.