Concentration Risk Stalks Retirement Savings

Some of the largest funds held in retirement savings accounts–presumed to be well-diversified–are not.  This exposes holders to larger drawdown risk and volatility than most understand.

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As hot stocks and sectors have pulled markets higher, their concentration in benchmarks and portfolios has increased.  See Tech Stock Rout is raising risks for American pension plans:

A handful of mega-cap tech stocks make up around 30% of some of the most popular funds in retirement plans, according to data compiled by Bloomberg.

Those big slugs of tech have rewarded investors handsomely — in 2020, Apple Inc. gained more than 80% and Amazon.com Inc. more than 76%. But when benchmark 10-year U.S. Treasury bond yields spiked to a one-year high on Thursday, and fears grew that an era of very low-interest rates could be nearing an end, the soaring valuations of mega-cap tech stocks became harder to justify and the shares led the broad market down.

…With mega-cap tech shares on a tear, and a stock’s weight in the S&P index determined by its market capitalization, just five tech companies — Apple, Microsoft Corp., Amazon, Facebook Inc., and Google parent Alphabet Inc. — make up 24% of the index, up from 17% at the start of 2020.

In the last market bust in 2000, the leading tech darlings fell an average of 80% and took 15 years to recover their 2000 high.  With boomer savers now 20 years older, a similar setback will be that much harder to recover from.

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