By Tim Courtney, Chief Investment Officer

After the kind of decade we’ve had in the US stock market, it’s not unusual to see heavily concentrated portfolios. That will happen when the market itself has become concentrated. Large single-stock positions that have not been rebalanced are common today, but these positions come with real risks.

The broad US large cap space has had interesting returns recently, with the S&P 500 Index returning roughly 15% annualized over 1,3,5,10, and 15 year periods as of mid-August. This has been far above its longer-term average of around 10%.¹

Much of this rise and outperformance has come from a handful of stocks, which have grown to become megacap stocks and take up a huge slice of the overall market.² Because of this, it’s now common to find portfolios with one or two stocks making up well over 50% of the total portfolio.³ If the heavily weighted companies are successful though, is this really a problem?

It is, because unlike other risks, concentration risk has no expected reward. Historically, investors have been rewarded with higher returns for taking on risks of uncertainty (market, illiquidity, credit, and term risks to name a few).⁴ However the market doesn’t provide you with higher expected returns if you take on concentration risk. Quite the opposite – the average stock has tended to underperform the broad market return as time goes on.⁵

Other problems can be expectations and valuation. Consider a company that has grown quickly and is positioned well in a sector that the market believes will grow meaningfully over the next decade or more. High expectations can lead to high valuations, and many, if not most, of the time very successful companies can’t live up to them. Zoom is a great example here. It is a good company that many of us use every day. But high expectations and valuations made it a terrible investment for someone who bought the stock in 2020 or 2021.⁶ The stock is down around 82% from its 2020 highs and has moved very little in three years.⁷

But what about the companies that can live up to expectations? A good example here is Oracle. Back in 2000, the market appeared to price in annual earnings growth expectations of 12% for decades.⁸ This level of growth over a long time period is very difficult, and average growth has been closer to 5% - 6%.⁹ However, after some setbacks and a very bumpy ride over the last 25 years, Oracle achieved an impressive 12% annual growth rate since 2000.¹⁰ Its reward? A return roughly equal to that of the broad market.¹⁰ That is your expected reward when you meet expectations, even high expectations – a market return.

That doesn’t sound enticing enough to justify taking on concentration risk. To outperform the market, a company has to grow even faster than what the market already anticipates.

We also know that companies don’t last forever. The average lifespan of a company in the S&P 500 has declined over time.¹¹ Concentrated bets often assume the future will look like the past, but few businesses can sustain outperformance for 10 or 20 years straight.¹¹

Paying taxes on a highly appreciated stock is often the reason investors are hesitant to pare a concentrated position. But there are ways to manage this cost, which often is much less than the cost of having a stock experience a 50%+ decline.¹²

If you have any questions, please contact your Exencial advisor.

Sources:

1. Investopedia (5/16/25) – S&P 500 Average Returns and Historical Performance
2. Investopedia (10/21/24) – Wave Goodbye To the Stock Market's Historic Run, Goldman Sachs Says
3. The Wall Street Journal (5/23/25) - Yes, You Have Too Much Money in That One Hot Stock
4. Britannica (9/3/25) - Risk vs. reward: The first step toward measuring and managing risk
5. Financial Advisor (5/31/24) – Why Concentrated Stock Positions Are A 'Loser's Game'
6. The Motley Fool (8/5/25) – Zoom Stock Outperformed the Market Over the Last Year. Time To Buy?
7. Barron’s (2/24/25) - Zoom Beats Earnings Estimates. Why the Stock Is Still Down.
8. The New York Times (6/21/00) - Oracle Says Earnings Exceed Estimates
9. Macrotrends (data as of 6/1/25) - Oracle Revenue 2010-2025 | ORCL
10. Finance Charts (data as of 8/6/25) – Oracle (ORCL) Net Income CAGR
11. Innosight (data as of 5/1/21) – 2021 Corporate Longevity Forecast
12. Forbes (5/4/25) - How To Manage Risk Exposure And Taxes In Concentrated Stock Portfolios

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S&P 500® Index (S&P 500®) is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.