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The S&P 500 index, a benchmark for U.S. equity markets, is designed to provide a broad representation of the economy by including 500 of the largest publicly traded companies. How the S&P 500 is weighted may pose a problem from a risk standpoint. Its current market capitalization-weighted structure has led to significant concentration in a handful of companies. As of December 2024, the top five firms—Apple, Nvidia, Microsoft, Amazon, and Alphabet—collectively accounted for approximately 29% of the index’s total value, marking the highest level of concentration in over 60 years.

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This concentration poses diversification challenges for investors relying solely on the S&P 500. A downturn in these dominant companies could disproportionately impact the overall performance of the index, exposing investors to heightened risk. To mitigate such risks, let’s consider some popular alternative investment strategies and compare them to the outcomes of the market cap weighted S&P 500:

1. Equal-Weighted S&P 500 Index: Unlike the traditional S&P 500, an equal-weighted index assigns the same weight to each constituent, ensuring that no single company has an outsized influence. Historically, the S&P 500 Equal Weight Total Return Index has demonstrated competitive performance. For instance, as of January 15, 2025, it reported a 10-year annualized return of 10.83%, reflecting its potential for robust long-term growth. Within the last 5 years the market cap index grew roughly 112% compared to the equally weighted index that gained 84.4%. This trend is continued if looking at the last 20 years, with the market cap index gaining 613% compared to 587%. Interestingly, when looking at this from 1990 – present (34 years), Equal weighted S&P 500 returns outperformed market cap weighted indexes. Both had incredible returns of 4,039% for equally weighted vs 3,284% for market cap weighted indexes.
2. Gold: Gold has long been considered a hedge against economic uncertainty and inflation. From 1928 to 2024, gold delivered an average annual return of approximately 5.12%. While this is lower than the historical returns of stocks, gold’s value often rises during periods of market volatility, providing a stabilizing effect within a diversified portfolio. Primarily this is used as a hedge against inflation and an asset that is highly liquid.
3. Real Estate: Investing in real estate, particularly single-family homes, offers both income potential through rentals and appreciation over time. Historically, real estate has provided an average annual return of about 4.23% from 1928 to 2024. Although this return is modest compared to equities, real estate investments can offer diversification benefits and act as a tangible asset that often appreciates independently of stock market fluctuations. These numbers are somewhat skewed, it discounts rental income (which may or may not be significant), nor does it discuss the tax benefits that comes from owning real estate.

While the S&P 500 remains a cornerstone of many investment portfolios, its current concentration in a few large companies introduces specific risks. However, despite this, unless you can travel back to 1990 and invest in a equally weighted S&P 500 index, it remains an asset that outperforms other options. Diversifying through alternative investments such as an equal-weighted S&P 500 index, gold, and real estate can help mitigate these risks and contribute to a more balanced and resilient investment strategy.