Caitlin's Corner

The Peach Problem: Why Your "Diversified" Portfolio Might Be Riper for Risk Than You Think

Over the weekend, I participated in my town's fall equinox festival- a celebration centered around giving thanks to the fall harvest. Since I no longer have a garden, my family's "harvest" comes from the farmer's market, grocery store, and occasional orchard trips. Our recent orchard adventure sparked a realization about what's happening in the US stock market that every investor should understand.

The Orchard Incident

In the final hours of our summer orchard trip, with our family melting down in the heat, we opted for a divide-and-conquer approach. Our only guideline: "Pick what you want, meet back here in an hour!"

What did we gather? Despite gorgeous eggplants, delectable cherry tomatoes, plump bell peppers, and ripening apples, we were all hypnotized by the vibrant orange peaches in the center orchard. Their sweet smell and juicy appearance proved irresistible. We hauled home terrifyingly huge boxes of peaches, and little else.

The Stock Market's Peach Problem

The US stock market is having the same issue. It's filled with "peaches" (big tech companies leading the AI revolution) and their stocks are the vibrant orange fruit in the center orchard that everyone can't resist.

Consider your investments:

• S&P 500 index fund (like VOO): a basket full of peaches.
• Total US stock market fund (like VTI): still heavy on peaches.
• Nasdaq fund (like QQQ): nothing but peaches.

A great strategy used by many investors is to diversify with a few different funds that track different indexes. Think back to my family at the orchard: we each set out with a different basket to fill. These baskets would represent a fund, and ideally, our family would be well-diversified in produce if we each filled up a different basket (from different parts of the orchard). But, that’s not what happened in my family, and that’s not what’s happening with most investors’ portfolios right now.

Why This Matters: Understanding Market Cap Weighting

Let’s talk about one of the most well-known indexes as an example: the S&P 500. Think of indexes like scoreboards for companies in a particular category. The S&P 500 is a giant scoreboard of 500 of the biggest U.S. companies. Each company’s “score” depends on its size:

Bigger companies = heavier weight

Smaller companies = lighter weight

If a big company’s stock goes up, the whole S&P 500 score rises more. If a small company’s stock goes up, the S&P 500 barely changes. So:

Bigger companies = more influence on the S&P 500

Smaller companies = less influence on the S&P 500

That’s why, when the stock of a giant like Apple moves, it matters way more than if the stock of a small company moves. The same is true in the Total US Stock Market index; it’s heavily weighted.

So even if you think you’re diversified, your baskets may not be. It’s like having one eggplant, three cherry tomatoes, and 100 peaches.

And peaches are great! Until they’re not. When they’re mealy or out of season, you’ll wish you had picked more cherry tomatoes (trust me- I'm having early-stage peach withdrawal over here 😰).

The same goes for investing. If your portfolio is overloaded with big tech, you could face more risk than you realize.

A Common Portfolio Problem

Consider an investor following popular TikTok finance advice with this allocation:

• 50% VOO (S&P 500)
• 20% VTI (Total US Market)
• 30% QQQ (Tech sector)

First, let me be clear: I'm not providing investment advice.

Second, this "diversified" portfolio is actually heavily concentrated in mega-cap US tech companies, creating more risk than the investor might realize.

What Can We Do About It?

This doesn't mean selling all your tech-heavy funds (we like peaches, remember!). Instead, consider reallocating more into funds that invest in companies that are underrepresented in the larger indexes. Here are just *some* examples:

By Company Size:

• Small-cap funds: AVUV, SPSM
• Mid-cap funds: VO, IJH

By Sector or Region:

• Energy sector: VDE
• International markets: Funds tracking FTSE All-World Index

Think of it as designating different buckets: one for small fruits, one for medium fruits, one for fruits that are ripe now, and one for fruits that will ripen later. You'll drive home with variety- some you can eat immediately, some later. If some don't taste great, you have others to enjoy.

At the End of the (Harvest) Day

Not every bucket will have the best fruit at any given time, but you want to avoid a scenario where none of your buckets have decent fruit.

When it comes to your portfolio: Are you more concentrated in tech than you intended? Tech might be the best-tasting fruit right now, but what happens when market conditions change?

The goal isn't to avoid successful sectors; it's to ensure you're not putting all your eggs (err- peaches) in one basket. 👩‍🌾

P.S. If you're concerned and want to learn more about how to protect your wealth in these changing market conditions, join our free money conversation next week!

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📕 I couldn't resist sharing this divine peach focaccia recipe. I recommend sprinkling some Maldon salt flakes on top 🤌.

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