Would you be willing to bet 25% of your company 401(k) retirement plan account value on six stocks?
That would make about as much sense as taking a large part of your 401(k) account to the local casino, and making six consecutive bets on the roulette wheel.
In reality, you are taking on a very similar level of risk in regard to your “buy-and-hold” investment management strategy with your S&P 500 index mutual fund.
The six FAGMAG’s stocks—Facebook, Apple, Netflix, Microsoft, Amazon and Google (Alphabet)—now account for about 25% of the S&P 500 Index.
So, for every dollar you have invested in your company 401(k) retirement plan S&P 500 Index mutual fund option, those six stocks are driving your long-term investment returns.
This is another common sense reason that there is really no such thing as the textbook definition of “diversification” that is possible on our default company 401(k) retirement plan mutual fund menu.
Here is another reason. When you get time, log in to your company 401(k) retirement plan provider web site. Go to the Fund Information or equivalent tab.
Look up the most recent holdings (probably June 30, 2020) of each mutual fund you currently own. Take a look at the top ten stock holdings of each mutual fund. Then take a look at how large a percentage of those top ten stock holding make up each mutual fund you own.
I have seen company 401(k) mutual funds invested in their top ten stocks that make up over 65% of the mutual fund value.
You will also find that those same six FAGMAG stocks and one more, and probably Tesla, dominate each growth stock market mutual fund option on your default company 401(k) menu.
I hope this exercise finally educates you to the fact that it is not logically possible to try to diversify your company 401(k) retirement plan account. No matter how many more times your company 401(k) retirement plan provider or one of the mutual fund companies tries to sell you on the concept.
The S&P 500 is up around 30% from early April. Have you ever wondered how that is possible in the middle of current record high unemployment, company bankruptcies, and economic malaise?
Now you know the answer. The S&P 500 is not the real U.S. economy. The index is largely dominated by the fortunes of a few companies.
No diversification. Instead, “overweighting” on the fortunes of technology companies, and Netflix, that are all currently trading near-all time high valuations.
Know what you own in your company 401(k) account now. More importantly, don’t think for one minute that you are diversified with the mutual funds you currently own.
Ric Lager
Lager & Company, Inc.
