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Americans are more invested in the stock market than ever before. Stocks accounted for a record 45% of assets held by U.S. households and nonprofits in the second quarter of this year, according to Federal Reserve data. To put that in perspective, it was about 10% 40 years ago and in the 30% range before the pandemic.

On one hand, this is a milestone worth celebrating: Investing is no longer an exclusive club for the wealthy. Greater access through workplace retirement plans and easy-to-use investing platforms have allowed more people to get in on it.

And stocks are having a great run, pushing benchmarks to new record highs over and over again.

But with this much riding on the market, what happens if it falls?

At the Mercy of the Markets

It’s a good question to ask ourselves, given not just the record investment levels, but how concentrated the market is now. In 2010, the 10 largest companies in the S&P 500 made up about 19% of the index, — the broadest to track the U.S. stock market.

Today Nvidia, Microsoft, Apple, and the other top 10 companies account for about 40% of the index, more than than the entire tech sector did just 15 years ago.

Much of the market’s growth has been driven by advances in technology — most recently, enthusiasm for artificial intelligence. Shares of both Microsoft and Google-parent Alphabet have hit record highs this year on the back of their AI activities. But if those companies stumble, the entire market can feel it.

Or there could be another broad sell-off. At the start of the COVID-19 pandemic, the stock market experienced some of the sharpest drops in history. And earlier this year, the S&P 500 briefly fell into bear market territory amid news of steep new tariffs on imports.

Although the stock market has generally moved higher over the long-term, these tougher times can make investing feel perilous.

Why Diversification Matters

One way to counter these risks is to avoid putting all of your eggs in one basket. Diversifying means you reduce concentration risk by spreading investments across different assets, industries, or regions, so that poor performance in one area may have less impact on your overall portfolio. Because not all investments move in the same direction at the same time, you may be able to offset losses in one area with gains in another. This balance can help protect against large losses tied to any single investment.

“If everything in your portfolio is crushing it, you likely are not diversified enough,” says Brian Walsh, SoFi’s Head of Advice & Planning.

There are many different ways to put your eggs into different baskets. You can diversify your portfolio by:

•   Region: Mix U.S. and international stocks to balance local and global growth.

•   Sector: Add exposure to industries with different strengths and weaknesses. Manufacturing might be more influenced by the economic cycle, for example, while retail might be more sensitive to inflation.

•   Basic asset type: Combine generally riskier stocks with more stable bonds.

•   Alternative asset types: Add assets like real estate, commodities, or private investments for even broader exposure.

And funds that track assets in different parts of the market, like mutual funds or exchange-traded funds, make it easy to provide diversification to your portfolio.

So what?

With so much of wealth wrapped up in stocks, major market moves have the potential for dramatic impact. And that may test the resolve of even the most committed investor. Concentration is a real risk, but a well-diversified portfolio can help you stay resilient and focused on your long-term goals, no matter what the headlines say.

Related Reading

Americans Have More Money in Stocks than Ever Before. Economists Say That’s a Bright Red Flag (CNN Business)

The Investing Risk You Might Be Overlooking When Buying Popular Stocks (Morningstar)

U.S. Stock Market Concentration Risks Come to Fore as Megacaps Report Earnings (Reuters)

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Diversification can help reduce some investment risk. However, it cannot guarantee profit nor fully protect in a down market.

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