Overview
Investors have enjoyed several strong years in the stock market.
Artificial intelligence, large technology companies, strong corporate earnings, and continued economic growth have helped drive markets higher and created substantial gains for many portfolios.
Strong performance can also change the amount of risk investors carry over time.
In a recent episode of Clear Money Talk, Tim Clairmont and Tyler Andrews, CFP®, NSSA®, Wealth Advisor, were joined by Gene Goldman, CFA®, Chief Investment Officer at Cetera, to explore the question: Are investors taking too much risk right now?
Their discussion focused on portfolio concentration, market valuations, diversification, volatility, and making sure investment risk remains aligned with each investor’s long-term goals.
Some Portfolio Risk May Be Hiding in Plain Sight
One of the biggest themes of the conversation was concentration within the S&P 500.
The S&P 500 contains hundreds of companies, yet the index is weighted based on company size. Larger companies therefore represent a much greater portion of the index.
Gene explained that the ten largest companies currently represent roughly 40% of the S&P 500.
That means someone who owns an S&P 500 fund may have considerably more exposure to a small group of companies than they realize.
The concentration can become even greater for investors who also own individual technology stocks or receive company stock through their employer.
Understanding what is actually inside a portfolio can help investors identify overlapping positions and determine how much exposure they have to specific companies, industries, or investment themes.
Risk Should Match the Investor
The appropriate amount of investment risk depends heavily on the individual.
Age, retirement timing, income needs, financial goals, time horizon, and overall financial position all influence an appropriate investment allocation.
A younger investor with decades before retirement may have a portfolio with a larger allocation to stocks.
Someone approaching retirement may place greater emphasis on income, stability, and protecting assets needed in the near future.
Gene emphasized reviewing the portfolio based on long-term objectives.
Market performance can cause allocations to shift over time. A portfolio that began with an appropriate balance several years ago may now have a much larger stock allocation because equities appreciated faster than other investments.
Regular reviews can help bring the portfolio back in line with the investor’s intended strategy.
Are Investors Being Compensated for the Risk?
Every investment involves a relationship between risk and expected return.
Investors generally accept additional risk because they expect additional potential return.
Current bond yields have made that calculation especially relevant.
Gene discussed how yields available from fixed-income investments have become more attractive. That gives investors another option when evaluating how much additional stock-market risk they want to carry.
Valuations also matter.
Stock prices are relatively high in several areas of the market, particularly among some of the largest growth and technology companies.
Corporate earnings have remained strong, with AI-related businesses contributing substantially to recent earnings growth.
Investors can consider both sides of that equation: the potential growth available from equities and the income opportunities currently available from fixed income.
Volatility Is a Normal Part of Investing
Market pullbacks occur regularly.
Gene shared that the S&P 500 has finished with positive returns in 38 of the past 46 years, while the average maximum decline within those years was approximately 14.2%.
That means meaningful declines can occur during years that ultimately finish with positive returns.
Several factors are currently worth monitoring, including higher market valuations, elevated bond yields, geopolitical uncertainty, energy prices, and inflation.
At the same time, Gene pointed to several areas of strength.
The economy remains resilient, corporate earnings have been strong, significant cash remains available for investment, and market participation has begun expanding into small-cap, mid-cap, value, and other areas.
Understanding that volatility regularly occurs can help investors maintain perspective when markets move sharply.
Diversification Remains a Core Strategy
Diversification was one of the clearest recommendations throughout the episode.
A diversified portfolio can include exposure across different company sizes, investment styles, industries, geographic regions, fixed income, and other asset classes.
Gene described diversification as owning investments that may “zig when the rest of the market is zagging.”
That becomes especially important when a small group of investments has produced unusually strong returns.
Tim shared an example of an investor with approximately half of their investment net worth concentrated in a single stock.
A position like that can create significant exposure to the performance of one company.
Tim referenced a general rule of thumb of keeping an individual stock below approximately 10% of net worth, while recognizing that individual circumstances can vary.
Diversification can help spread risk across more areas of the market and reduce dependence on any single investment.
So, Are Investors Taking Too Much Risk Right Now?
For some investors, the answer may be yes.
Strong market performance can gradually increase stock allocations and create greater concentration in a small number of large companies.
The most useful step is reviewing the portfolio in the context of your own financial goals.
Look at how much you hold in stocks and bonds.
Review exposure to individual companies and industries.
Check for overlap between funds, ETFs, and employer stock.
Consider whether your current allocation still reflects your retirement timeline, income needs, and ability to tolerate market volatility.
Diversification and regular portfolio reviews can help identify risks that may otherwise remain beneath the surface.
The goal is to carry an amount of risk that supports your long-term financial plan.
Watch the full episode of Clear Money Talk for the complete conversation with Tim Clairmont, Tyler Andrews, CFP®, NSSA®, Wealth Advisor, and Gene Goldman, CFA®, Chief Investment Officer at Cetera.
