Most of the people I meet with believe they've already solved the diversification problem. They own an S&P 500 index fund. Five hundred companies, thirty-plus industries, one ticker, four basis points. Done.
I understand the appeal. I've built portfolios around low-cost index funds for years, and I'm not here to talk anyone out of them. But if you opened your statement this month, saw a number near an all-time high, and assumed the risk underneath it looks the same as it did five years ago, I'd gently push back.
Right now, the ten largest companies in the S&P 500 account for roughly 35% of the entire index. At the peak of the dot-com bubble, the episode we all point to as the cautionary tale, that figure was closer to 25%.
You own 500 stocks. About ten of them are driving your outcome.
This isn't a flaw in the index. It's the design.
The S&P 500 is weighted by market capitalization. As a company's value grows, its share of the index grows with it. That mechanism is exactly why index funds have worked so well: they let winners run and they don't charge you for the privilege of guessing which ones.
The catch is that the mechanism has no brakes. It doesn't ask whether a position has gotten too large relative to your goals. It doesn't care that you retire in four years. It simply reflects whatever the market has decided, and lately the market has decided that a handful of companies tied to artificial intelligence and its infrastructure deserve an extraordinary share of the pie.
So the concentration you're carrying today isn't the result of a bad decision. It's the result of a good decision that quietly kept working.
The problem is what "diversified" means to you versus what it means to the fund
Here's the question I ask clients: if the five or six largest holdings in your index fund fell 30% over the next eighteen months, what happens to your plan?
For a 38-year-old contributing every two weeks, the honest answer is usually "not much, and I'd be buying at lower prices." That investor has time and cash flow on their side. Volatility is the toll they pay for a long horizon.
For a 61-year-old who plans to start drawing income in three years, it's a different conversation entirely. That's a sequence-of-returns problem. Withdrawing from a portfolio that just dropped sharply locks in losses you never recover from, no matter how strong the eventual rebound. The math is unforgiving in a way that's easy to underestimate when markets are calm.
Same fund. Same holdings. Completely different level of risk, because risk isn't a property of the investment. It's a property of the relationship between the investment and the person who owns it.
It's usually worse than one fund suggests
The concentration rarely shows up in a single line item. It compounds across accounts.
A typical household I sit down with might hold an S&P 500 fund in a rollover IRA, a target-date fund in the 401(k), a Nasdaq-oriented fund someone added a few years ago because it was performing well, a taxable brokerage account with a few individual technology names, and if they work for a large public company, restricted stock or an ESPP position on top of all of it.
Five accounts. It looks like a diversified household balance sheet. Look through to the underlying holdings and you may find the same six or seven companies represented over and over, sometimes at 40% or more of total equity exposure.
That look-through analysis is the single most useful thing I do in a first meeting, and it takes about twenty minutes. Most people are genuinely surprised by the number.
The part that gets skipped: you can't always just sell
This is where I'll put on my CPA hat, because the investment commentary you read online almost never addresses it.
In a retirement account, rebalancing is simple. Sell, buy, no tax consequence. In a taxable brokerage account, the position you most want to trim is usually the one with the largest embedded gain, that's precisely why it grew into a problem. Selling it triggers capital gains, potentially the 3.8% net investment income tax, and possibly a state tax bill on top.
I've watched investors decide the tax cost is too high, do nothing, and carry concentration risk for years by default rather than by choice. That's not a plan. It's a tax bill making an asset allocation decision on your behalf.
There are better options, and several of them work well right now:
Redirect new money. The least expensive rebalancing tool you have is your next contribution. Point new 401(k) dollars, bonuses, and deposits toward what you're underweight rather than selling what you're overweight. This works slowly, which is fine if you start early enough.
Give appreciated shares instead of cash. If you're charitably inclined, donating long-held appreciated stock to a donor-advised fund or directly to a charity removes the position, avoids the capital gain, and generates a deduction. Note that 2026 rules changed this calculus: itemized charitable deductions now only count above 0.5% of adjusted gross income, and the benefit is capped for filers in the top bracket. That makes concentrating several years of giving into a single year "bunching" meaningfully more attractive than spreading it out.
Harvest losses deliberately. Broad indexes near record highs still contain individual positions and fund lots trading below cost. Realized losses offset the gains from trimming a concentrated winner. Careful lot selection turns a painful sale into a manageable one.
Use the low-bracket years. If you retire before Social Security and required distributions begin, you may have several years of unusually low taxable income. Some investors can realize long-term gains at a 0% federal rate in that window. It's a narrow door, but it's a real one, and it closes.
Put the right assets in the right accounts. Tax-inefficient holdings belong in tax-deferred accounts; the assets you're least likely to sell belong in taxable ones, where they eventually receive a step-up in basis at death. Asset location doesn't change your allocation, but it changes what you keep.
What I'd actually do about the allocation
Two adjustments come up most often, and neither one requires predicting anything.
The first is equal weighting a portion of U.S. large-cap exposure. An equal-weight version of the S&P 500 gives each company the same slice regardless of size, which cuts technology exposure roughly in half and trades at a materially lower earnings multiple. There are real trade-offs: expense ratios run closer to 0.20% than 0.04%, and quarterly rebalancing creates turnover that can generate capital gains distributions, which matters in a taxable account and not at all in an IRA. I treat it as a sleeve, not a core replacement.
The second is owning more of the rest of the world. Non-U.S. equities represent something like 35% to 40% of global market capitalization, and plenty of American households hold 10% or less. International stocks outperformed U.S. stocks by the widest margin in three decades in 2025 and have held a modest edge again this year. Vanguard's long-run projections currently favor non-U.S. equities over U.S. equities for the coming decade.
I want to be careful here, because this is exactly where investors get hurt. The right response is to set a target allocation you'll hold through periods when it looks wrong. The wrong response is to sell what just lagged and buy what just won. That's not diversification. That's performance chasing wearing a diversification costume.
To be clear about what I'm not saying
I'm not predicting a crash. I don't know what the market does next, and neither does anyone quoting a target on television.
There's a reasonable case that current leadership is nothing like 1999. These are enormously profitable companies funding their investment largely out of earnings rather than debt, which is a meaningfully healthier structure than the speculative names of the dot-com era. Serious investors at large institutions look at the same data and reject the bubble framing outright.
My job isn't to forecast which side is right. It's to make sure that if the pessimists turn out to be correct, my clients' retirement plans survive it, and that if the optimists are right, they still participate.
Diversification is what lets you be wrong about the future without it being expensive.
A reasonable next step
Pull up every account you own, 401(k), IRA, brokerage, HSA, company stock, etc., and find the top ten holdings of each fund. Add up how much of your total equity exposure sits in the same handful of names. If that number surprises you, it's worth a conversation.
If you'd like a second set of eyes on it, I'm happy to run a look-through analysis of your portfolio and show you exactly where the concentration sits, along with the most tax-efficient path to fixing it if it needs fixing. Sometimes the answer is that you're fine. Either way, you'll know rather than assume.
Frequently asked questions
Is an S&P 500 index fund still a good investment? For most long-term investors, it remains an excellent core holding: low cost, broadly owned, and historically effective. The issue isn't whether to own it. It's whether it should be your only equity holding, and whether your concentration in a handful of mega-cap companies matches your time horizon.
How concentrated is the S&P 500 right now? The ten largest companies represent roughly 35% of the index, compared with about 25% at the dot-com peak.
What's the difference between the S&P 500 and the equal-weight S&P 500? The standard index weights companies by market value, so the largest firms dominate. The equal-weight version holds all 500 at approximately the same size and rebalances quarterly, producing far less technology exposure and a lower valuation at somewhat higher cost and turnover.
How much should I hold in international stocks? There's no single right answer, but institutional research generally lands in the range of 20% to 40% of equity exposure. What matters more than the exact number is choosing a target and holding it consistently.
Can I reduce a concentrated position without a big tax bill? Often, yes. Directing new contributions elsewhere, donating appreciated shares, harvesting offsetting losses, spreading sales across tax years, and realizing gains during low-income years can all reduce the cost substantially compared with selling all at once.
Tyler Dicke, CFA, CPA, is a retirement and investment manager at Cadence Wealth Advisors, where he focuses on tax-aware portfolio management for individuals and families.
This material is for informational and educational purposes only and does not constitute investment, tax, or legal advice, nor a recommendation to buy or sell any security. Index performance and market data referenced are as of August 2026 and are subject to change. Diversification does not ensure a profit or protect against loss in a declining market. Past performance is not indicative of future results. Tax rules are complex and depend on individual circumstances; please consult your tax professional regarding your specific situation.