There is little argument that passive investing has grown rapidly. Low costs and strong market returns driven by a small group of dominant companies have made index investing feel sensible and unavoidable. Over the past decade, passive investing has grown rapidly
As markets move into a period of volatility and structural change, it is worth asking whether portfolios are truly diversified or do we continue to simply follow benchmarks that reflect yesterday’s winners.
Research by Professor Hendrik Bessembinder, published in March 2026, provides valuable insight. Examining almost 30,000 US listed stocks over the past century, his work shows that most companies have failed to create long term wealth for investors. Market returns have been overwhelmingly driven by a very small number of exceptional businesses, while the majority of stocks have delivered modest or negative lifetime outcomes (Bessembinder, 2026).
The Australian share market has always been relatively concentrated, but in recent years this concentration has intensified. The S&P/ASX 200 is now dominated by a small group of very large companies, particularly major banks and resource stocks, meaning index returns are increasingly driven by a handful of names rather than broad participation across the market.
This matters because most portfolios are built around these benchmarks. Portfolios can appear diversified while being heavily exposed to the same small group of companies and themes.
Career risk is a factor. Fund managers and advisers are judged against benchmarks. Moving too far away, even for sound long term reasons, is professionally risky. The result is that capital tends to remain concentrated in familiar names, reinforcing existing market leaders rather than questioning whether those exposures still make sense.
Active investing is often seen as a solution, but active strategies still sit close to the index. In practice, this can lead to portfolios that behave much like passive ones during periods of market stress, while offering limited protection against concentration risk.
For investors approaching or in retirement, this issue becomes more important. At this stage, portfolios are not measured against an index. They are measured against real outcomes such as income, capital preservation and lifestyle stability. Heavy exposure to a narrow group of dominant stocks may not align well with those goals.
Thoughtful investing today is not about chasing trends or predicting markets. It is about being intentional, understanding where risks are truly concentrated, and ensuring portfolios are positioned for the future rather than anchored to the past.
This isn’t an argument against passive investing but rather than thinking diversification will take care of itself, it’s important to have a broader reflection as standing still seems to be the real risk.
References
Bessembinder, H. (2026) One Hundred Years in the U.S. Stock Markets. SSRN Working Paper, March. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6438198 (Accessed: April 2026).
Livewire Markets (2026) 100 years of market data: Why most stocks fail and concentration is accelerating. Available at: https://www.livewiremarkets.com/wires/100-years-of-market-data-why-most-stocks-fail-and-concentration-is-accelerating (Accessed: April 2026).
