Market participants, even some seasoned professionals, have tendencies to make mountains out of anthills with some investing topics. Concentration risk is a prime example.

Advisors know that this is an increasingly discussed topic and that frequency is rooted in a small number of stocks commanding large percentages of marquee benchmarks such as the S&P 500. Indeed, the top five members of the S&P 500 combine for more than 26% of that gauge. That’s high relative to historical norms.

(Chart Courtesy: Fidelity Investments)

That chart isn’t as worrisome as some investors may perceive it to be. In part, it reflects the results of weighting stocks by market capitalization – the methodology employed by the S&P 500 and a slew of other widely followed indexes. As market values for Nvidia (NASDAQ: NVDA) and other beloved mega-cap growth stocks surged, those stocks command bigger percentages in gauges like the S&P 500. That’s just how cap weighting and it’s not necessarily cause for alarm.

Stop Fretting About Concentration Risk

Even some experts concur that concentration risk, though a valid topic of discussion, isn’t necessarily cause for alarm.

“While the market has become historically expensive and ‘top-heavy’ over the past seven years—and increasingly so—stock valuations have not reached the excessive levels of the past,” notes Fidelity. “Moreover, performance dispersion among the largest components in the S&P 500 may be an opportunity, as it helps create room for active managers to add value through security selection.”

As the asset manager points out and as is confirmed in the chart above, today’s concentration levels are arguably high, but there have been instances when those levels were high. That is to say historical context is important and may even be useful in terms of allaying skittish clients’ related apprehensions.

“For example, the top five stocks represented 20% of the market or more for the roughly four-decade period from 1926 through the mid-1960s,” observes Fidelity. “Within this time frame, the market suffered a major drawdown early on at the start of the Great Depression, then another major drawdown in 1937. Yet it also posted a gain for most of the years from the mid-20s through the mid-60s. More than 20 of those years were double-digit advances.”

Speaking of History…

Including the Great Depression, the Nifty Era and the Dot-Com Bubble, there are some ominous examples of elevated levels of concentration being resolved in “black swan” fashion. However, reduced levels of concentration don’t prevent those scenarios, either. For example, concentration risk was relatively tame from the bursting of the internet bubble through 2016, but that period included the Global Financial Crisis.

Likewise, the bear markets of 2020 and 2022 weren’t caused by a small number stocks looming large in the S&P 500, but those declines were caused by the coronavirus pandemic (2020) and soaring inflation and subsequent Fed tightening (2022).

Something else for advisors and investors to keep in mind: High concentration opens the door to opportunity for those willing to perform some homework.

“If there’s a reason for investors to welcome a concentrated market, it’s that it has tended to create opportunities for stock selection based on upside earnings surprises,” concludes Fidelity.

Related: Dividends Fell Out of Favor—That’s Exactly Why This ETF Deserves Attention