March 4, 2021 | 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.  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.

Danielle Park March 4th, 2021

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