Time for a mid-year investment review
The Indiana Society of Chicago hosts an annual black-tie event in December. During COVID, the event began being held in Indiana, but historically, it was held at a nice hotel in Chicago; I am sure the event will return to the city at some point.
My good friend John W would invite a group of us every year. I've been able to attend a few times over the years. The event would involve separate, group-themed cocktail parties, then we would all come together for dinner and VIP speeches. Governor Holcomb spoke once when I attended, Mitch Daniels another time. While putting on a tux is never in my wheelhouse, the event itself is nice, very large, and well attended.
Right after the dinner and speeches, the big event venue room would begin to empty. For the unfamiliar, this appeared to be when the occasion was wrapping up. In reality, however, this is when the party actually started — the kind of party that would leave me sitting in a disheveled tux devouring a greasy gyro at some late-night hot dog joint at 4:00 a.m. It is the kind of party that should only come once a year.
As we filed out of the main event, my group of middle-aged guys would reconvene at the hotel bar, discuss our next move, and head out, off the leash, dressed in tuxes into the city night. I call this a great rotation; the party wasn't over, it was just changing forms with the best part still ahead.
It's possible a similar maneuver may be occurring in financial markets, making a mid-year portfolio review and rebalance particularly timely right now.
In my experience, for a stock investor, ten years can seem like the entirety of existence. A trend lasting this long shifts investment philosophies, alters portfolio strategies, and has the capacity to become perceived as a "new normal."
For ten years now, the stock market has been dominated by large-company stocks, and for the past three years, this dominance was extended into what is being called mega-cap stocks, which are companies with values exceeding an astounding trillion-dollar-plus. Going even deeper, as excitement over AI technology reached a boiling point during the last 18 months, this mega-cap focus became even more concentrated into the huge, AI-focused "Mag-7" companies driving the stock market.
Even as experienced investors, like myself, have been questioning the sustainability of this mega-cap concentration, the returns provided by these companies have been busy skewing perceptions and creating biases in our own decision-making. Sometimes, decades of investing experience isn't always enough to inoculate against the seduction offered by the type of outsized performance experienced with these Mag-7 stocks over the past few years.
Despite knowing better, diversification seemed to become having a portfolio of five semiconductor stocks and two AI companies. Because these stocks seemed to go up every day, this type of concentration began to feel natural and normal. It is neither, nor is it prudent. I believe this could have become the foundation of an asset bubble, and I've been afraid that's where markets may have been heading.
Fortunately, the aforementioned rotation may be solving this challenge, and recent performance leadership changes may be a good sign. In the U.S., the universe of large-company stocks is most widely recognized as the S&P 500 index, which is designed to follow the 500 largest publicly traded American companies. At this time, the index is heavily concentrated in the aforementioned mega-cap stocks, which now comprise about 40% of the index value, with five of the seven Mag-7 making up about 25% of the index value. So, using the S&P 500 as a proxy for the mega-caps and even for the Mag-7 seems reasonable.
Over past months, indexes which are more diversified and less concentrated in the Mag-7 stocks have been subtly taking the leadership mantle from the S&P 500, and in my opinion, this is a good thing. The two indexes getting my attention are the international equity index (FTSE Global All Cap Index) and the Russell 2000, which includes small and mid-sized companies in the U.S.
Stocks inside these indexes represent a much broader spectrum of industries, market cap values, and national markets. Observing the outperformance of these indexes, in my opinion, is in some ways indicative of healthier overall financial markets, and it tells me that while the party may be changing venues, it may also have some legs yet to run.
With this in mind, hitting the 2026 mid-year mark provides an excellent opportunity to review investment strategies, identify potential concentration risk, and rebalance where appropriate. Diversification, as it turns out, isn't just a quaint idea from the past; it remains not only a viable risk management tool, but can also provide the opportunity to find new performance leaders as the rotation plays out.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. All indices are unmanaged and may not be invested into directly. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
