When a handful of companies drive 40% of index performance, a bad earnings call from NVIDIA or Apple doesn’t just hurt that stock. It drags down your entire “diversified” portfolio.
Individual company risk becomes systematic risk.
Table of Contents
Historical Pattern
History shows this kind of concentration doesn’t last.
Railroads made up 63% of total market value in 1881. That dominance faded when new technology, new transportation alternatives, and regulation showed up.
Inevitable Disruption
At every point in history, big winners eventually face disruption.
The same pattern repeats throughout market history. What dominates today won’t dominate forever.
Conclusion
Market concentration creates a false sense of diversification. When a few companies drive most index performance, your portfolio becomes vulnerable to individual stock movements rather than truly spread risk.
History demonstrates that no sector maintains extreme market dominance permanently. The railroad example shows how even the most dominant industries eventually lose their grip on market leadership.
Understanding this concentration risk is essential for any investor relying on index-based strategies.