The Quiet Risk Hiding in Today’s Market: Portfolio Concentration

It is difficult to avoid the market’s loudest headlines.

One day, investors are focused on enormous price swings among artificial intelligence companies. The next, attention shifts to oil prices, interest rates, or conflict near the Strait of Hormuz.

Those events matter, but they can distract investors from slower-moving changes that may have a greater effect on long-term portfolio results.

One of the most important is concentration risk.

Many investors believe they are diversified because they own an S&P 500 index fund. While the S&P 500 holds approximately 500 companies, those companies are not equally represented. The index is weighted by market capitalization, meaning the largest companies receive the largest allocations.

By the end of 2025, the ten largest companies represented nearly 41% of the S&P 500—more than twice their combined weighting a decade earlier. S&P Dow Jones Indices described the concentration reached in 2025 as a level not seen since the mid-1960s. (S&P Global)

That does not mean investors should abandon large U.S. companies. It does mean they should understand what they actually own.

Owning 500 Companies Does Not Automatically Mean Being Well Diversified

Imagine investing $100,000 in a market-cap-weighted S&P 500 fund.

Although the fund may hold roughly 500 securities, approximately $40,000 could effectively be tied to its ten largest companies. Many of those companies are also exposed to similar trends, including artificial intelligence spending, cloud computing, digital advertising, semiconductor demand and consumer technology.

The concentration extends beyond individual companies. As of June 30, 2026, information technology represented approximately 38% of the market-cap-weighted S&P 500 benchmark shown in S&P Dow Jones Indices’ factor dashboard.

An investor could also own several different mutual funds and ETFs that all hold the same large technology companies. The account may look diversified because it contains multiple funds, while the underlying holdings remain heavily concentrated.

This is why diversification should be measured by looking through the funds to the actual companies, sectors, investment styles and geographic regions represented in the portfolio.

Concentration Is a Risk—Not a Market-Timing Signal

High concentration does not necessarily mean a market decline is imminent.

S&P Dow Jones Indices studied earlier periods when a small number of companies dominated the index and found that the relationship between concentration and subsequent market performance was more complicated than a simple “high concentration equals poor returns” rule.

Many of the dominant companies from 1965 eventually declined, disappeared or lost their leadership positions. However, the broader index continued to evolve because emerging companies were already included and gradually became larger parts of the market. (S&P Global)

That adaptability is one of the strengths of a broad market-cap-weighted index.

The concern is not that the S&P 500 is broken. The concern is that an investor may unknowingly have more exposure to a small group of companies than their financial plan, risk tolerance or retirement timeline can support.

Concentration becomes especially important when:

• Retirement is approaching and the portfolio will soon fund withdrawals.
• An employee also receives salary, bonuses, RSUs or stock options from one of the companies held in the portfolio.
• A large taxable gain makes the investor reluctant to sell.
• The investor owns several overlapping large-cap growth funds.
• A decline in one sector could materially affect near-term financial goals.

The goal is not to predict which company will stumble. The goal is to prevent one company, sector or investment theme from having too much control over the outcome of the financial plan.

Six Ways to Reduce Portfolio Concentration Risk

1. Measure the Concentration Across Your Entire Financial Life

Begin by reviewing more than the percentage held in a single brokerage account.

Concentration may come from:

• Individual company stock
• RSUs, stock options or employee stock purchase plans
• S&P 500 and large-cap growth funds
• Sector or technology ETFs
• A pension or career tied to a particular industry
• Private business ownership
• Real estate concentrated in one geographic market

An executive may believe company stock represents only 10% of the investment portfolio. Once unvested RSUs, future compensation and employment income are considered, the household’s economic exposure to that company may be much larger.

A proper review should identify the largest individual companies, sectors, investment styles and regions across every account.

2. Establish Written Rebalancing Rules

Rebalancing removes some of the emotion from deciding when to reduce a successful investment.

An investor might establish limits for:

• Maximum exposure to one company
• Maximum exposure to one sector
• Target percentages for U.S. and international stocks
• Target percentages for large-, mid- and small-cap companies
• The amount of cash and bonds needed for near-term goals

Rebalancing can be completed annually, when an allocation moves beyond a predetermined range, or through a combination of both approaches.

Vanguard notes that rebalancing is primarily a risk-management tool rather than a way to maximize returns. It can also be implemented tax-efficiently by directing dividends, interest, new contributions and portfolio withdrawals toward underweighted or overweighted asset classes before selling appreciated investments. (Vanguard Investor)

3. Diversify Within the U.S. Stock Market

Reducing concentration does not necessarily require abandoning U.S. stocks.

Investors can complement a market-cap-weighted S&P 500 allocation with exposure to areas such as:

• Mid-cap companies
• Small-cap companies
• Value-oriented companies
• Dividend-paying companies
• Equal-weighted strategies
• Companies selected using profitability or quality measures

For example, an equal-weighted S&P 500 strategy gives approximately the same allocation to each company rather than allowing the largest companies to dominate.

As of June 30, 2026, the S&P 500 Equal Weight Index had approximately 15% allocated to technology, compared with 38% for the traditional benchmark. However, the equal-weight index also trailed the traditional S&P 500 by 3.1 percentage points during the prior 12 months.

That difference illustrates an important point: diversification will not always improve short-term performance.

A diversified portfolio will usually contain something that is disappointing. That is not necessarily evidence the strategy is failing. It may be evidence the portfolio is no longer dependent on the same handful of winners.

4. Add Meaningful International Exposure

International stocks can provide access to companies, industries, currencies and economic cycles that are not fully represented in the U.S. market.

A globally diversified stock allocation may include developed markets in Europe and Asia as well as an appropriate allocation to emerging markets. International markets also tend to have different sector weights, with less dependence on the largest U.S. technology companies.

Vanguard describes true diversification as spreading investments across company sizes, sectors, investment styles and geographic regions. Its July 2026 portfolio outlook also identified relatively stronger opportunities in developed markets outside the United States, although those forecasts are uncertain and should not be treated as guarantees. (Vanguard Investor)

International investing introduces its own risks, including currency movements, political uncertainty and different regulatory environments. The purpose is not to assume international stocks will immediately outperform. It is to reduce reliance on one country and one group of companies.

5. Use Bonds and Cash Based on the Financial Plan

Stock diversification alone may not solve the concentration problem for someone approaching retirement.

If money will be needed within the next several years, part of the solution may be reducing the portfolio’s overall dependence on stocks.

High-quality bonds and cash reserves can help fund near-term spending without requiring an investor to sell concentrated equity positions after a major decline. They may also reduce total portfolio volatility, although bonds carry interest-rate, credit and inflation risks.

The appropriate allocation should be connected to the investor’s withdrawal needs, Social Security strategy, pension income, tax plan and time horizon—not simply to a forecast about the next market correction.

6. Create a Tax-Aware Exit Plan for Large Individual Positions

A concentrated stock position often becomes difficult to address because selling it may create a large capital-gains tax bill.

Doing nothing, however, is still a decision. It means accepting the risk that the position could decline faster than the tax liability would have grown.

Depending on the investor’s circumstances, potential strategies may include:

• Selling shares gradually over several tax years
• Selling higher-cost-basis lots first
• Coordinating sales with lower-income years
• Using capital losses elsewhere in the portfolio
• Donating appreciated shares to charity
• Contributing shares to a donor-advised fund
• Considering an exchange fund for a sufficiently large qualifying position
• Using an options-based hedge when appropriate

Exchange funds and options strategies can introduce substantial fees, restrictions, liquidity concerns and tax complexity. They should not be viewed as simple substitutes for selling and diversifying. Consider gradual liquidation, hedging, exchange funds and charitable strategies as potential tools, while the appropriate combination depends on the investor’s broader financial plan.

Diversification Can Feel Uncomfortable

When a small number of companies are driving market returns, diversification can feel like willingly owning the investments that are not working.

That discomfort is part of the process.

Vanguard notes that following past performance to its logical conclusion eventually leads an investor toward a single stock—the investment that happened to perform best during the period being measured. That may look brilliant in hindsight, but it creates enormous dependence on an unknowable future. (Vanguard)

The purpose of diversification is not to outperform the hottest stock every year.

It is to build a portfolio that does not require one company, one sector or one country to remain dominant for the financial plan to succeed.

At Rigden Capital Strategies, we believe investment decisions should begin with the financial plan. Before making changes, investors should consider their goals, retirement timeline, income needs, taxes and the consequences of both selling and continuing to hold a concentrated position.

The headlines will continue to change. A disciplined diversification strategy can help keep the portfolio focused on what matters most.

About Rigden Capital Strategies

Rigden Capital Strategies was founded on a simple belief: financial advice should be personal, transparent, and centered around your goals—not built on generic models or product-driven sales. With decades of combined industry experience, we’ve developed a process grounded in three core values: value, integrity, and progress.

As a fee-only fiduciary, we provide personalized, goals-based wealth planning services designed to adapt with your life. Our services include investment management, retirement and tax planning, and estate coordination. We use a mix of active and passive strategies to help clients navigate market changes with clarity and confidence.

We believe in building real relationships and delivering clear, actionable strategies—focused on long-term planning and aligned with your objectives.

Your goals, our strategies. Together, let’s make your goals happen.

Disclosures: Diversification and asset allocation do not guarantee a profit or protect against loss. Investments in international markets, small companies, bonds, options and other securities involve specific risks. This material is for educational purposes and should not be interpreted as a recommendation to buy or sell any particular security. Investors should consult their financial, tax and legal professionals regarding their individual circumstances. While we strive for accuracy, we do not guarantee the completeness or reliability of the information provided. Investment decisions should be based on individual circumstances, and we recommend consulting a qualified professional before implementing any financial, legal, or tax strategies. Past performance is not indicative of future results, and all investments carry risks, including potential loss of principal. No investment strategy can guarantee success or protect against loss in all market conditions. Investors should carefully consider their risk tolerance, investment objectives, and financial circumstances before making investment decisions.