🏷️ Tagg: diversification

For years, one of the most common pieces of investing advice has been remarkably simple: buy a broad market index fund and hold it for the long run.

There is a great deal of evidence supporting that advice. Index funds offer low costs, broad diversification, and a way to participate in the growth of the economy without attempting to outsmart the market. For many investors, they remain an excellent choice.

Still, there is a subtle detail that is easy to miss.

Many investors think of a fund tracking the S&P 500 as a basket containing five hundred companies of roughly equal importance. In reality, that is not how most major indexes work.

The largest companies receive the largest weights.

This means that although an index fund may hold hundreds of businesses, its performance can be influenced disproportionately by a much smaller group.

That distinction may not matter much during ordinary times. It becomes more interesting when a particular sector captures the imagination of investors.

In the current market, artificial intelligence has become one of the dominant narratives. Enormous amounts of capital have flowed toward companies seen as leaders or beneficiaries of the AI boom. Some of these firms have reached valuations that would have seemed extraordinary only a decade ago.

Whether this enthusiasm proves fully justified is a question for the future. The technology itself is undeniably impressive. The economic consequences may be equally profound.