I don't tinker much with my retirement portfolio. Still, I checked recently to see if my investments had an adequate stake in assets currently beating the S&P 500. The answer? Not really.
If you're a buy-and-hold investor, you should check to see how truly diversified you are. While the S&P 500 has delivered a respectable 10% return year to date, it has fallen behind other areas of the market. The S&P SmallCap 600 index is up 21%, large-cap value is ahead 16%, and international stocks -- after surging 32% last year -- are up 13%.
The latest scorecard shouldn't matter much if you're saving for retirement years from now. You have time to weather many boom and bust cycles.
But if you're only a few years away from retirement or drawing income from your portfolio, it's important to make sure you aren't just diversified by asset class. You also need protection against perhaps the biggest risk in global markets: an AI-fueled bubble.
The artificial-intelligence trade, and tech more broadly, now infuses far more than just the S&P 500. Small-caps have gotten a big boost from AI spending, along with some value indexes loaded with relatively cheap tech stocks. AI has also become a big driver of emerging markets thanks to South Korea and Taiwan -- both now proxies for memory chips and semiconductor manufacturing.
Companies of all sizes and places would be hurt if and when the momentum stalls. But there are ways to AI-proof your portfolio. Adding defensive sectors like consumer staples and pharmaceutical stocks may help in a selloff. For retirees, a cash cushion of up to two years' worth of portfolio withdrawals can also insulate your daily spending needs from market fluctuations.
AI-related stocks may continue to perform well, but IBM's 25% collapse -- its worst one-day loss in history -- was a warning signal that even relatively sturdy companies with attractive dividends are vulnerable.
Investors should pick a portfolio mix they're comfortable with and stick with it throughout market cycles. "Be careful not to performance-chase," says Christine Benz, director of personal finance and retirement planning for Morningstar. "It's a pattern we see so often, where an asset type surges and only then do investors begin to add assets to it. Oftentimes they're too late."
If you're overweight the S&P 500, consider selling a bit and diversifying into small- or mid-cap funds -- keeping in mind the tax consequences if you do this in a taxable account. The SPDR Portfolio S&P 600 Small Cap exchange-traded fund has 13% in tech, a relatively small amount. The iShares Russell Mid-Cap Value ETF has even less, at 11%.
For international, consider the iShares MSCI EAFE Value ETF. It has an attractive 3.5% dividend yield, fueled by financials, consumer staples, healthcare, and energy -- all on the cheaper end of the market. Tech is just 4%.
If the bulk of your assets are in a target-date fund in your 401(k), the fund takes care of asset allocation for you. These one-size-fits-all funds are great for young investors and those who don't want to tinker much. But the lack of customization could become a problem for those on the cusp of retirement, who have less wiggle room if the market heads south. If you're nearing retirement and think your target-date fund takes too much risk -- or too little -- consider liquidating out of it and taking a more à la carte approach.
When I recently took a peek at my target-date fund, my investment dashboard showed everything but the cap weighting of my fund's holdings, so I put the ticker into Morningstar.com and it showed the breakdown.
My target-date fund has a little over 3% in small-caps and nearly 14% in mid-caps, a bit less than the broad market but not enough to bother changing. Ditto the 23% allocation to non-U.S. equities, which could be a little higher. The fund has 27% in tech, but that's far below the S&P 500 at 47%.
It's anyone's guess if the S&P 500's relative underperformance will continue. But with a diversified portfolio, there's no need to prognosticate. Some part of your portfolio is bound to be doing comparatively well in any market environment.
Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 16, 2026 12:50 ET (16:50 GMT)
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