The Ascend Letter

Planning Corner: Concentration vs Diversification

If you had invested in the S&P 500 in 2000 and held all the way to 2013, your return would have been roughly 3% a year. Adjusted for inflation, closer to 1%. Thirteen years, and your money essentially went nowhere, even though you did the "right" thing and simply owned the index.

Now don't get me wrong, index funds are a simple, low-cost way to invest, and the truth is most active managers fail to beat the index over time. For a lot of people, an index is exactly the right tool.

But an index fund hides the fact that it is not as diversified as you think it is.

Consider today's S&P 500. Roughly 40% of it is AI and tech. About a third of the entire index sits in just seven companies. So when you buy that one simple index fund, you are not spreading your money across 500 businesses the way you think. You are making a very large, very concentrated bet on a handful of names or a single sector.

If just one or two of those seven giants fell 30%, your "diversified" index fund would feel it, hard, even though you never bought those stocks directly. You are exposed whether you like it or not.

None of this is a reason to abandon index investing. It is a reason to understand what you actually own. If you are taking the "index and chill" approach, planning around that hidden concentration still matters.

And I will leave you with one simple truth worth remembering:

So think honestly about where you are in your investing cycle. If you are young and still building, concentration may be doing exactly what you need it to. If you are closer to relying on that money, preservation moves up the list. Know which phase you are in, and adjust accordingly.

The Macro

For most of the summer, bad news was good news. This week that flipped.

Friday's jobs report came in hot. The economy added 162,000 jobs in August, more than triple the 53,000 expected, and the prior two months were revised higher. Unemployment held at a low 4.1%. On paper, a strong, healthy labor market. And stocks fell on the news.

Why? Because a strong economy hands the Fed every reason it needs to keep rates high, or even raise them. The odds of a September rate hike jumped to nearly 60%. Yields spiked, gold dropped, and the dollar firmed. For the first time in a while, a rate hike is now the more likely outcome than a hold.

President Trump is publicly demanding the Fed cut rates. The data, and Fed Chair Warsh, are pointing the other way. The Fed meets September 15 and 16 to settle it.

But the more interesting battle is over long-term rates. Two forces are pulling in opposite directions. On one side, a hot economy and a hawkish Fed push yields up. On the other, the Treasury steps in. Starting September 9, Secretary Bessent begins the expanded bond-buying program he announced last month, and he is expected to aim that buying at the long end of the curve specifically to force those rates back down.