Are you truly diversified in the S&P 500? | Personal Opinion

josevas217 (80)in PussFi 🐈 • 10 hours ago

Hello PussFi friends, good day to all. There are some things that have remained unquestioned over time, almost modern dogmas of the financial world. One of them is the idea that investing in the S&P 500 or the Nasdaq 100 is practically synonymous with smart diversification, peace of mind, and letting your money work for you without major surprises. I'm not saying this is false, but I do believe it has important nuances that are often overlooked, and that's what I want to talk about today. I'd like to know what you all think as well.

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I've been reviewing the composition of the S&P 500, and I was struck by the fact that nearly 30% of its value is concentrated in just seven giant companies. We all know which ones they are: the large technology and consumer goods conglomerates that dominate the global market. Now, let's think about this carefully: we're talking about an index that tracks the performance of 500 companies, but almost a third of its return depends on the performance of only seven. Isn't that, at the very least, remarkable?

Because the traditional narrative is that by investing in an ETF that tracks the S&P 500, we're distributing risk across hundreds of companies, sectors, and business models. And yes, technically that's true. But in practice, the weight of those seven companies is so significant that if their CEOs make poor decisions, if they lose competitiveness, if they run into regulatory problems, or if they simply stop growing at the expected rate, the impact on the index can be considerable, at least in my opinion.

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The Nasdaq 100 is even more concentrated because its tech-based nature gives these mega-companies an even greater weighting. So, when someone says they are “well diversified” because they invest in these ETFs, that statement needs some qualification. It's not the same to have 500 companies with relatively balanced weightings as it is to have 500 where a few carry almost the entire load.

Now, I'm not saying the system is going to collapse tomorrow. If we analyze historical performance, the S&P 500 has tended to rise in the long term. That's the reality. It has survived wars, financial crises, tech bubbles, and pandemics. And those who have invested with a long-term horizon have generally seen growth. But the long term is one thing, and the short and medium term are quite another.

In shorter periods, this concentration can amplify movements. If these large companies are booming, the index soars. But if they decline, it can also fall sharply. And that's a risk that isn't always mentioned when passive investing is promoted as the magic bullet for everyone.

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Furthermore, we're in a context where many of these companies already have extremely high valuations. Infinite growth doesn't exist. There comes a point where maintaining high rates becomes increasingly complex. And if the market starts adjusting expectations, the blow can be felt more intensely precisely because of that disproportionate weight.

In short, this isn't about demonizing ETFs, far from it. They are useful, practical, and low-cost tools. But like everything in life, they have their nuances. Investing in the S&P 500 is not the same as spreading your money equally among 500 companies. There is concentration, there is dependence, and there is inherent risk.

This is a personal reflection. You may not agree with me, and that's fine. But I think it's worth looking beyond the headlines and truly understanding where we're putting our money. Goodbye, take care.