Watching Your Weight

Market strategists are expecting a continued strong stock market this year, but what are we supposed to do about it? How is the answer different if you’re continuing to save versus spending during retirement?

One obvious answer if you’re still saving is to keep buying. Stocks, of course, and this is even more true when the market is volatile. The answer gets complicated if you’re retired or planning to retire soon, so we’ll save that for next week.

IRA contribution limits for 2026 are $7,500 for those younger than 50 and $8,600 for those 50 or older. If you’re still funding for 2025, the limits are $7,000 and $8,000, respectively.

401(k) limits for this year are $24,500 with an over 50 catch-up of $8,000, plus $11,250 more if you’re aged 60-63.

So, you have room to save if you can afford it, but what do you buy?

If your aim is to invest in the US stock market, you’d usually buy an S&P 500 index fund, a “large cap” US fund, or total market fund. By far, index funds are the most straightforward way to access the stock market, and I’ve been using them for a long time. For good reasons, asset growth of these funds has more than doubled in the last ten years to something like 40% of all fund assets.

That said, S&P 500 index funds track the 500 largest stocks traded in the US across 11 sectors and (typically) simply organize them by size, regardless of their sector. For a while now, index performance has been driven by the Technology and Communication Services sectors, since that’s where the AI and AI-adjacent companies live and that’s what investors are excited about. Taken together as of last Friday, those two sectors are worth 46% of the S&P 500. Of that, 35% is the Tech sector, which itself is dominated by AI-related names. NVIDIA, Apple, Microsoft, Broadcom, and Micron Technology collectively make up nearly half of the Tech sector, while NVIDIA, Apple, and Microsoft alone represent 38%.

The combined 46% market weight of these two sectors was almost this high during the Tech Bubble, but we’ve also seen it move around a lot, even to less than half that if we look back over a few decades. The two sectors comprised barely 15% of the S&P 500 before Netscape’s ill-fated browser and Microsoft’s Internet Explorer were launched in the mid-90’s, and around 30% pre-Covid, for example. Our economy has changed a lot over that time span, and many argue that the growth of these two sectors shouldn’t be worrisome because it represents our evolution as a tech-based economy.

While that makes sense, one of the issues for investors is knowing what you’re buying and how the holdings and risk profile of these index funds change over time. The Tech sector itself, for example, has different top holdings than ten or 20 years ago and is about 50% more volatile than the S&P 500. This extra volatility feeds into the broader index and helps to amp up risk as the Tech sector weighting grows. In other words, the S&P 500 fund you bought a decade ago looks different today and is often more volatile.

So, if you’re still growing your nest egg, having most (or all) of your money in a broad US stock market fund has worked and will work because it’s primarily a bet on our economy, and for all our bumps and bruises it’s long been a bad idea to bet against America. That said, at least in the near term it’s also looking like more of a bet on the future of AI. At this point slightly more than half of the S&P 500 is still invested across nine other sectors, but will we see that flip to AI-related sectors not just driving performance but also holding most of the index value? It’s possible.

Interestingly, that balance has shifted over the last few months. S&P 500-based funds that “equal-weight” their holdings instead of by size have been outperforming the traditional version, and dividend-oriented funds that naturally avoid the big tech names, have also been outperforming. This may be some reasonable reshuffling after such a good run, but it’s also a reminder that there are 11 sectors, not just two.

I guess the point I’m endeavoring to make is that index funds are useful tools for accumulating wealth, but they’re continually changing beneath their static label. It’s best to understand those changes to know what your investment exposure is within the fund or funds you own, if it’s still appropriate for your situation and what you might be missing, all while keeping the peddle to the metal when it comes to saving.

Have questions? Ask us. We can help.