How safe is your 401(k) plan? Now is a good time to check investments

How safe is your 401(k) plan? Now is a good time to check investments

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With the stock market flirting with record highs — and 30,000 in view for the Dow Jones Industrial Average — this is a good opportunity to check under the hood of your investment portfolio to see what you actually own.

If you have a 401(k) plan and haven’t evaluated it in a while, now’s the time to do that — because you might be less diversified than you think.

Many investors want broad diversification, as it helps to spread risk among hundreds if not thousands of stocks, bonds and other assets. Many have bought funds such as those pegged to the Standard & Poor’s 500 index that hold slices of 500 stocks. That’s normally good diversification, which helps to explain the popularity of S&P 500 index funds and their emergence in workplace 401(k)-type programs.

But there are times when diversification runs in reverse, especially as big, powerful stocks rise in value to take up bloated shares of these funds and drive an outsize amount of their investment performance. Such trends can be great while they last, but they invariably cool off.

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When it comes to accessing money before retirement age, there’s a good, bad and ugly side to it.

A possible danger with funds pegged to the S&P 500 and some other indexes is that the stocks they own aren’t equally weighted. Rather, they’re weighted by the stock-market value of each one. That means bigger, more valuable corporations exert more impact on overall investment performance. Right now, a handful of giants are tipping the scales.

The five biggest stocks weigh in at around 17% of the entire S&P 500, meaning the other 495 stocks account for the remaining 83%. Two giants in particular, Apple and Microsoft, combine for 9% of the total. All this is fine if the giants continue to surge. But if things reverse, they could drag down the funds dependent on them, taking down your portfolio with them.

The current concentration of top-five stocks is the highest since before the dot-com bubble burst in 2000, wrote John Petrides, a portfolio manager at Tocqueville Asset Management, in a new report. Investors might remember that things didn’t work out so well back then for a lot of stocks — and the indexes and funds that held them.

Coin jar labeled 401(k) that's tipped over.

Darlings of the S&P 500

Over the past three years, six companies in particular have driven the market higher, Petrides said in an interview. These are the FAANG stocks — Facebook, Amazon, Apple, Netflix and Google — along with Microsoft.

He said the two biggest holdings, Apple and Microsoft, are more valuable than four entire sectors or industry groups — energy companies, utilities, real estate stocks and those in basic materials such as metals, wood products and chemicals.

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