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 a 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 – comprising 60% equities and 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 fluctuations in a portfolio. A 60/40 portfolio behaves more like an 85/15 split in terms of volatility exposure.

Add to that the fact that a handful of tech giants often dominate the equity portion, and the picture becomes even more skewed. For example, the top ten companies in the S&P 500 account for nearly 40% of the index, with technology companies making up an even larger share (Chart 1).

Even broader indices, such as the CRSP US Total Market Cap Index, show similar concentration (Chart 2). And 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 accounted for approximately one-third of the MSCI All-Country World Index (ACWI). Today, it accounts for roughly two-thirds. This shift means that international portfolios are now heavily influenced by US market trends.

Historical data show that every major correction of 10% or more in US equities over the past 30 years has been accompanied by similar or worse declines in international stocks. In other words, geographic diversification might not provide the protection investors expect during market downturns.

True diversification from risk factors (not tickers)

To genuinely reduce the risk of large drawdowns, investors must think beyond the number of holdings and focus on the underlying risk factors that drive returns. A portfolio with thousands of securities may still be vulnerable if all these assets are 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 equities (S&P 500), bonds (US 10-year Treasuries), foreign exchange (long dollar vs. euros), commodities (BCOM Index), and gold.

A simple portfolio constructed in this manner 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 decrease 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 (Chart 3).

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.

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