For all this with 401Ks where fund options are limited.

This guy thinks the S&P is overweight the mag 7 and valuations aren't or can't be calculated correctly considering the big AI change that's coming. He mentions deepseeks cheaper AI, plus the need for more investment in energy..etc

Is the S&P more risky than history tells us?

Yes.

Yes it's lopsided. But while it's particularly lopsided right now, it's always been weighted towards whoever is on top, and the biggest companies didn't get to be the biggest because they suck. They grew into being the biggest. And whoever eventually replaces them some day will do the same.

Yes and it's why broad index funds fell but fell less than Mag 7. It's how it always is, but more concentrated than historically typical.

Problem is, in the 401K funds, other than going heavier in bonds there is not many other options than the S&P.

My only other options are small and mid cap fund, total world or international


That's it

Any passive index fund is going to lend itself to being overweight the high performers. It's how the algorithms work. The obvious downside is when the passive algorithm switches to sell mode, everyone is going to be selling mag7 at the same time. At that point, the active managers are going to be able to snag a ton of value from the passive investors.

The S&P index allocations are updated each quarter as i understand it


If so, it was just updated and the mag 7 should have been reduced since a bigger chunk of recent losses in the S&P were drivin by the Mag7

Jeeper79 said:

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Yes it's lopsided. But while it's particularly lopsided right now, it's always been weighted towards whoever is on top, and the biggest companies didn't get to be the biggest because they suck. They grew into being the biggest. And whoever eventually replaces them some day will do the same.

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While true - it is also true that the passive index funds that simply buy the big gainers disproportionately move capital to these heavyweights without particularly smart underwriting. The big companies do in fact have significant value creation pathways but it's not the whole story.

To me this is an allocation question. Go run a long term (5yr+) weekly chart of SPY vs RSP. This is what I use to gauge allocation between the mag7 overweight SPY vs the equal weighted S&P 500 (RSP).

If you look at the chart you can see it was wise to be into RSP (instead of SPY) from 2020 till the ratio broke the trend in March 2023. SPY has continued to outperform since then. The ratio has come back to the trend line but I don't see anything YET which would warrant a significant shift from SPY to equal weight. I have roughly a 80/20 allocation right now between SPY/RSP. If I see a break in the trend line I will shift heavier into RSP.

Sims said:

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Jeeper79 said:

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Yes it's lopsided. But while it's particularly lopsided right now, it's always been weighted towards whoever is on top, and the biggest companies didn't get to be the biggest because they suck. They grew into being the biggest. And whoever eventually replaces them some day will do the same.

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While true - it is also true that the passive index funds that simply buy the big gainers disproportionately move capital to these heavyweights without particularly smart underwriting. The big companies do in fact have significant value creation pathways but it's not the whole story.

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When you say the passive funds move capital "to" the big gainers, keep in mind that these firms are rarely selling new stock. They generally aren't raising more capital. The transfer of value is from late stage investors to early stage investors on the secondary market.

Sure, I just mean they're moving it out of your pocket and into those companies via your 401k. Whether it's via price appreciation or share qty, it's the same.