The S&P 500[i] has become the standard for many investors. Warren Buffet has repeatedly praised the index for its low cost and diversification. Owning the S&P 500, through an ETF such as SPY, has become the investment strategy du jour with recent stellar returns and widespread endorsements for its appeal as a low-risk, high-return strategy — a perception rooted in short-term memory rather than long-term reality. Hence, it’s what the media reports on and why many use it as a benchmark.
However, the reality is more nuanced. Investors often believe that diversifying across 500 holdings reduces risk and expect returns closer to the 10% historical average[ii]. Yet, recent returns of 26% in 2023, 25% in 2024, and an 20.6% average since 2019[iii] have created a short-term illusion that the S&P 500 mitigates risk while yielding extraordinary returns, making this entire process seem deceptively easy.
Exploring the current market capitalization weighting in the S&P 500, which results in a few highly concentrated holdings, reveals the increased fragility of the index as it stands today. In contrast, we believe a globally diversified portfolio might offer a more robust approach for long-term success.
Traditionally, diversification means spreading investments across different asset classes, industries, or regions to manage risk, rather than putting all your eggs in one basket. By doing so, investors aim to reduce extreme downside risks while sacrificing the potential for extreme upside returns. In other words, the goal of diversification is to minimize the tails at either end of the bell curve, making outcomes more predictable and mitigating downside risk along the way.
But if “diversification” reduces risk and smooths returns, how has an index allocated across 500 companies generated returns 2.5 times greater than its historical average in recent consecutive years[iv]?
Indexes like the S&P 500 use market capitalization to determine the weight of each stock in the index. This means the larger a company’s market capitalization, the more influence it has on the index’s performance. As of today (January 2025), the S&P 500 is heavily reliant on a few tech giants, with the top 10 companies representing nearly 40% of its market capitalization[v]. The remaining 490 companies make up the remainder of the index.
At the end of 2024, Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, Tesla, Broadcom, Berkshire Hathaway, and Walmart accounted for approximately $21 trillion of the S&P 500’s $50 trillion valuation[vi]. Notably, the “Magnificent Seven” — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — contributed over 53% of the total return of the index, including dividends, according to S&P Dow Jones Indices[vii].
In contrast, only 8% of our globally diversified portfolios are concentrated in the “Magnificent Seven" stocks (as of January 2025), reflecting a more balanced allocation compared to the S&P 500’s heavy reliance on these companies.
Many investors mistakenly believe they are diversified simply because they own a fund that tracks the S&P 500 index. In reality, most do not understand that their future returns rely heavily on the performance of the 10 companies mentioned earlier, while owning only a fractional percentage of the remaining 490.
If these top 10 companies underperform, overall returns will drag significantly, even if the other 490 companies perform well. Conversely, when these concentrated holdings perform well, as they have recently, returns can proliferate. Simply put, overreliance on a few companies increases tail risk, creating potential for outsized gains or severe losses.
The Takeaway: If someone retired in the year 2000 with a portfolio heavily concentrated in one asset class (the S&P 500 in this example), they would have experienced significant erosion of their retirement savings during the first decade of withdrawals. This would have forced a substantial reduction in their sustainable spending moving forward or risk running out of money. Similarly, a Japanese citizen who relied heavily on the Nikkei 225 for “diversification” of their retirement portfolio in the early 1990s would have faced even worse consequences.
The human tendency to overlook the past often leads to history repeating itself. This underscores the importance of ignoring the noise and blindly chasing what’s “hot” in the short term.
Alternatively, this is why we create globally diversified portfolios comprised of 13,000+ companies in approximately 50 countries. By design, our portfolios are much more robust and avoid the fragility associated with overconcentration in a few holdings, ensuring they can weather market extremes in any part of the globe.
To illustrate this, let's compare a globally diversified portfolio (using the Dimensional Global Balanced Equity Strategy Index as a proxy) to the S&P 500 Index. The table below shows the growth of a dollar over each decade from 1970 through 2023, highlighting the cumulative return at the bottom. Notice that while individual decades may favor one index over the other, the globally diversified portfolio outperforms the S&P 500 by approximately 300% over the entire period.
As the table indicates, our investment philosophy embraces the timeless wisdom of the tortoise-and-hare analogy: slow and steady wins the race. Our portfolios are intentionally designed to avoid extremes in the short term — they will never produce the highest return in any given year, nor will they generate the lowest. Instead, they are designed to deliver more consistent, reliable performance that minimizes volatility drag and increases real returns over the long term.
For our clients with access to private markets and strategic opportunities to invest in concentrated holdings, our portfolios provide much-needed confidence, clarity, and direction before pursuing higher risk, higher reward strategies. By leveraging our portfolios to produce a more robust retirement income strategy, you can ensure that your future retirement income is more resilient and can be relied upon, permitting you to pursue additional speculative opportunities with prudence and peace of mind.
Adopting a disciplined, process-driven approach to investing — rather than chasing short-term returns in concentrated asset classes — leads to a more robust portfolio that has historically performed under more circumstances and produced superior outcomes. Again, ignoring short-term noise and focusing on a proven process fosters long-term, sustainable success.
“It’s looking at processes rather than outcomes. Too many people make decisions based on outcomes rather than process.”
—Michael Lewis, Author of Moneyball: The Art of Winning an Unfair Game
The recent outperformance of the S&P 500 underscores the influence of concentrated holdings and highlights the risks that come with it. While investing in the index may seem like a low risk “diversified” strategy, the reality is more nuanced. The heavy reliance on a few top companies introduces hidden risks that many investors fail to recognize.
So, why isn’t everyone pursuing global diversification? The answer is simple: because it’s hard! It’s hard to accept varying returns from different asset classes and to constantly feel like you're missing out on the top-performing segments of the market (FOMO). It’s hard to ignore noise from mainstream media. And resisting conformity to the masses is no easy task.
So, diversification is a good thing. The S&P 500 performing extremely well over the last few years shows that diversification works -- because diversification doesn’t work if all asset classes move together. By embracing global diversification and maintaining a disciplined, long-term approach with periodic rebalancing, investors can achieve less volatility and superior outcomes. The path to wealth creation does not require chasing short-term returns, but in the ongoing pursuit of a proven investment process.
Patience rewarded.
[i] The Standard and Poor’s 500 is an unmanaged, capitalization weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
[ii] The Uncommon Average: Long-Term Context on Annual Returns | Dimensional
[iii] SPY – Performance – SPDR® S&P 500® ETF Trust | Morningstar
[iv] SPY – Performance – SPDR® S&P 500® ETF Trust | Morningstar
[v] S&P 500 Companies by Weight
[vi] Top 20 S&P 500 Companies by Market Cap (1989–2025) – FinHacker.cz
[vii] Stock Market Gains Flow Mostly To Handful Of Companies | Investor's Business Daily
[viii] A Tale of Two Decades: Lessons for Long-Term Investors | Dimensional