Jason Zweig is one of my favorite Wall Street Journal writers. If I haven’t mentioned it already, I read everything he writes. Lately, he has been on a private markets rant in which he expressed his strong skepticism or outright dislike of them. So, when I read something by him not about private markets, it catches my attention. I think this one is behind a paywall (i.e. you must have a WSJ account), but here is a link to it, just in case.

In the piece, he contends that one shouldn’t get too worked up about having 33% in seven companies. He’s referring to the Standard & Poor’s 500 index (S&P 500), an index that I think is the world’s most-benchmarked-to benchmark, which has about a one-third allocation to the so-called Magnificent Seven (Mag 7), Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

He points out that on June 1, 1932, 12.7% of the value of the entire U.S. stock market consisted of just AT&T. Today, the largest of the Mag 7, Nvidia, accounts for just 7.8% of the market value of the S&P 500 and 6.9% of the total U.S. market.

His cursory recap of the arguments against indexing or passive investing goes like this.

  • In the 1970s and 1980s, tracking the market with low-cost index funds instead of hiring an expensive stock picker was “settling for average.”
  • In the 1990s, brokers called index funds “tax bombs” that would supposedly hit investors with huge, unexpected tax bills. Then came warnings that index funds couldn’t protect you against market crashes. More recently, stock pickers touted their unique abilities to pick socially responsible companies. (Never mind.)
  • “Concentration risk” is the newest in this long line of marketing blitzes.

Work as an advisor long enough, and you’ll realize that “investors need to be wary of messages about markets that are really about marketing.” He then includes this quote:

“The investment community has always agreed on all these tribal ‘truths’ that have no basis in data,” says Tim Atwill, a former senior analyst at Russell Investments and ex-head of investment strategy at Parametric Portfolio Associates

So should you bail out of your S&P 500 or other index funds?

No way.

That’s the conclusion of recent research by Mark Kritzman, chief executive of Windham Capital Management, and David Turkington, head of State Street Associates, both based in Cambridge, Mass.

After all, by definition, concentration goes up whenever winning stocks keep winning.

“Taking risk off the table every time the market gets more concentrated would have been very harmful historically,” Kritzman tells me. “It may help you avoid some fraction of the selloffs, but you incur a huge opportunity cost in losing out on the run-ups.”

He goes on to point out that larger companies are generally more diversified economically, geographically, and in their businesses; “the larger stocks are just safer,” says Kritzman.

What’s more, while we use the S&P 500 in portfolios, it usually comprises about 48% of an equity portfolio or segment. So, in a 60% stock/40% bond portfolio, the Mag 7 represent less than 10% of the portfolio (48% x 60% x 33%). When I used to work in a Trust Company setting, we would ask clients to sign exculpatory letters when one holding exceeded 20% of a portfolio, more than twice what Nvidia comprises presently.

It seems like, for now, this is an issue to be aware of but not overreact to.