They don’t call it March Madness for nothing. The first two rounds of the men’s 2021 NCAA tournament were filled with major upsets. Eight of nine Big Ten teams failed to advance to the Sweet 16 round.
If your bracket has exploded, you are not alone. Take the time you would normally spend watching the next round of tournament games to reseed your company 401(k) retirement plan mutual funds.
The stakes in your retirement savings are higher than ever. Most likely you have at least a part of your current company 401(k) balance invested in the low-cost S&P 500 index mutual fund on your company 401(k) menu. Right now, that mutual fund is as risky an investment option as it has ever been.
The S&P 500 is heavily weighted toward tech-like stocks right now. That over-weighting represents a huge amount of stock market investment risk.
Alphabet, Amazon, Facebook, & Tesla are an overwhelming 38% of the total S&P 500 capitalization. Realize that 38% of your S&P 500 index mutual fund is now invested in just four stocks.
And those stocks are all in the same sector of the U.S. stock market.
The valuation levels for tech-like stocks are near all-time high levels. The only higher valuation levels in U.S. stock market history were shortly before the 2008-2009 tech stock bubble. As a painful reminder, that was just prior to the last great stock market decline.
All-time high valuations are bad enough. The stock market has had to deal with a surprising rise in U.S. interest rates over the last few weeks. If that trend continues, you can add another even higher layer of risk for the S&P 500 index.
When interest rates rise, there is historic pressure on high tech stocks cash flow, valuations, and earnings. None of these pressures on their own is positive for any stock. Combined, the pressure on future stock prices compounds even more.
Your S&P 500 mutual fund is a highly concentrated investment in a single stock market sector with all-time high valuations and future price expectations. Most likely you would not sign up for that much risk investing your retirement savings.
Ric Lager
Lager & Company, Inc.
