The rise of passive, or index tracking, investing and the dominance of massive technology companies have created a landscape in which many portfolios are heavily concentrated in the same few names. 

This hidden risk could leave investors vulnerable to sharp losses and long recovery periods.

The myth of the balanced portfolio

The classic 60/40 portfolio – 60% equities, 40% bonds – is often touted as a balanced approach. But when it comes to risk, it’s anything but. 

Equities are significantly more volatile than bonds, meaning they contribute disproportionately to portfolio fluctuations. In fact, a 60/40 portfolio behaves more like an 85/15 split in terms of volatility exposure. 

Add to that the fact that the equity portion is often dominated by a handful of tech giants, and the picture becomes even more skewed. 

For example, the top 10 companies in the S&P500 account for nearly 40% of the index, with technology companies making up an even higher share (see Chart 1). Even broader indices, such as the CRSP US Total Market Cap Index, show similar concentration.

Source: Bloomberg, June 2025

What many investors perceive as diversified is, in fact, highly concentrated.

Global diversification isn’t what it used to be

Looking outside of US markets for diversification may seem like a logical step, but global equity benchmarks have also become increasingly US-centric. 

In the 1980s, the US made up about one-third of the MSCI All-Country World Index (ACWI). Today, it accounts for some two-thirds. This shift means that even international portfolios are heavily influenced by US market dynamics. 

Historical data show that every major correction of 10% and more in US equities over the past 30 years has coincided with similar or worse declines in international stocks. 

In other words, geographic diversification may not offer the protection investors expect during market downturns.

True diversification comes from risk factors, not tickers

To genuinely reduce the risk of large drawdowns, investors need to think beyond the number of holdings and focus on the underlying risk factors driving returns. 

A portfolio with thousands of securities may still be vulnerable if those assets are all influenced by the same economic forces. 

One alternative is a cross-asset strategy that allocates across equities, bonds, currencies, commodities, and gold – balancing each asset’s contribution to overall portfolio risk. A model portfolio could include:

A simple portfolio constructed in this way demonstrates remarkable stability in back testing. From December 1998 to June 2025, it delivered 80% of the return of a traditional 60/40 portfolio but with significantly lower drawdowns. 

While the 60/40 portfolio suffered four declines greater than 20% -- with a maximum decline of 34% -- during this period, the cross-asset portfolio experienced only one fall of more than 10%, and that was a modest 13% during the 2008 global financial crisis (see Chart 2).

Source: Bloomberg. June 2025.For illustrative purposes only. No assumptions regarding future performance should be made.

Final thoughts

Legendary investor, Warren Buffet, famously said his key lessons for investing were ‘Rule number 1: Never lose money; Rule number 2: Never forget Rule No. 1’.

The concentration risk in today’s passive portfolios is higher than ever. Investors who believe they’re diversified may be unknowingly exposed to significant downside. 

Avoiding large losses is critical to compounding returns and preserving wealth – especially for those nearing retirement or needing access to their savings. 

By focusing on true diversification across uncorrelated risk factors, investors can build portfolios that are more resilient to shocks and better positioned for long-term success.