Need to Position Against AI Concentration Risk, Said D.J. Tierney

D.J. Tierney, senior investment portfolio strategist at Schwab Asset Management, said that 'we don't know' when the party is over for the AI trade and that Schwab is advising investors to start making changes at the margins to position themselves to insure against concentration risk.

Well, let's talk about concentration risk because I think there's some folks out there who who don't really understand, I think that the way that some of these largest companies have increased their position in the S&P 500. and if you are just focused, you know, on investing in that, for example, maybe you're overweight.

Uh you you certainly are and and and to put it in context, uh we've run numbers on this. By the way, I checked the S&P 500 10 minutes ago.

After the alphabet correction.

Top 10 holdings, about 40% of the S&P 500.

So the yeah, the two numbers, the top five has been around 30 for the last quarter or two and the top 10 40%.

Is is that uh is there any historical uh comparison there?

Uh you have to go back to the late uh 19th century uh when railroad, the railroad capital buildout.

Why do we keep talking about railroads though?

Sorry, but that's that is the last time. So amongst our lifetime

you truly keep talking about railroads in 1860s and 70s.

So, yeah, of the modern era, a lot of people fall back to uh the late 1990s uh and the dot-com uh build up, uh which we now look back, we know that was a bubble. Uh the S&P 500 concentration top five then was about 17%. Today it's 30. So if sometimes I'll I'll advisors are interested in this by the way, when we have conference, we have panels on this and they all come to these to talk about it because they want to talk about what can you do.

And the ones that don't come, I say, well, if you're not worried now, is there a level where you will be worried? Because if the forces that got us here today in October 2026, they're not abating. I mean, the IPO forward calendar, potential M&A, it could get higher. And so if you're not concerned now, which we think you should be, because you have sector risk, you've got individual company risk in your what should be a diversified strategy. So, um, you know, we we're we're enjoying the opportunity to talk to advisors and engage.

DJ, the thing is, I mean, you go, you look at over the last five years, this is the big tech trade has been a great trade. We talk about buying the index, but you're really buying these big tech names.

It has been a great trade for investors. So like how do you figure out like, okay, this has been great for my portfolio. When do we know kind of the party's over or do we assume these companies are pivoting and thinking about embracing AI at this point? Like how do you know that that's not kind of our future in terms of that's where the growth is and the value creation.

Yeah, the the bottom line is is we don't know.

And so nobody does know. This could perpetuate for quite some time. And and and some of these companies may end up being the largest companies in the world in 10 years. What we can say with history with some certainty, look at 1970, look at 1980, look at 1990, the regime changes consistently happen. The top 10, eight go away, seven go away, eight go away. So historically speaking, it's we're we're very likely to have a shift in leadership. And you know, the Google move today as an example, a 12 and a half% drop in a day, these things can happen. And so what we're saying is just start to position yourselves. We're not saying wholesale make changes, but maybe at the margin start to do different index strategies.

For you, is this a sign that Alphabet is going to be outside of that top 10? Is this is this existential? Is this the end?

I I'm not making any call like that. That's a really big diverse cash flow, you know, creative company. They've got lots of lines of business. So I'm not making a call on Google.

Search business is still it's there.

Yeah, but it's a reminder that that that your concentration risk can have an impact.

But if you, I mean, but to to your point, if you were to go back and look at the biggest companies in the world, you know, 10 years ago, 15 years ago, 20 years ago. I mean, you'd be talking at some points about, you know, oil companies, you'd be talking about consumer companies. You'd be talking about, you know, a generation ago, railroad companies. So it's like the leadership absolutely changes.

Correct. Yeah. whether you're talking about AT&T, IBM, those were the companies in the 70s and 80s, whether you're talking at the dotcom, Cisco, Lucent, that doesn't come up as quite as often, right? That was a top 10 in the S&P 500. So there are changes.

Where is Worldcom? No, no, I'm just kidding. No, but what's interesting is, I think about diversification. What does it mean on a global basis? I am amazed how we don't really talk about global markets as much as we do in terms of your portfolio.

Right. Right. Well, we do. So there you go. Yeah, that one of one of the ways we like to point out is, by the way, if you leave the US, the sector diversification changes dramatically. So if you buy the even just developed, diversified, developed large company indices outside the US. Technology is not in the top four sectors, right? Things like uh consumer products, industrial commercial rise to the top financials. And so one diversifying metric might be let's look at your global versus US mix.

That's a good step step right there.

Do emerging markets have the attraction as much as they they've gone through their ups and downs, certainly volatility and so on and so forth. But I'm just curious.

Yeah, so I'll tell you our our our portfolio approach is to be globally diversified. So so is he is he is emerging markets of interest? Yes. and it always is. developed always is. So we we go global diversification right out of the gate and then we maintain it and we rebalance. So we take really long-term views and how we assemble our portfolios. And then the key is within asset classes like the US equity market, we'll diversify away from market capitalization. So whether it's active management or something like a strategic beta, we use fundamental indexing as a mainstay in our portfolio construction. So those are the ways you can find diversification within your asset.

Fundamental indexing is a big part of, right, that you guys are doing?

It is. Yes. Yeah, we've had a partnership there for coming up on 20 years. We have ETFs, we have index mutual funds.