The writer is an FT contributing editor
The current sell-off in the tech sector triggered by the progress of Chinese artificial intelligence start-up DeepSeek is a reminder of the risks of a concentrated stock market. The largest 10 stocks account for almost two-fifths of the S&P 500. Such concentration is unprecedented in modern times. Increasingly, equally weighted index products, which invest the same amount of money in every stock in a benchmark, are being touted as a way to dodge the risks of an ever more concentrated portfolio. Should investors heed these calls?
More concentrated stock markets make for less diversified passive portfolios. But this need not be a problem for either returns or even risk-adjusted returns. Having a third of your portfolio in a handful of stocks that compound high double-digit returns has been fabulous for passive investors in recent years, if less so for those active managers that underweighted Big Tech.