Why Now is the Time to Concentrate, Not Diversify, Your Equity Portfolio

The investment mantra of “diversify to mitigate risk” has long been gospel in volatile markets. But what happens when volatility plummets, and sectors decouple into stark performance tiers? Over the past five years, the market has undergone a seismic shift: prolonged low volatility and widening sector divergence have made traditional diversification a drag on returns. This is the era of concentrated bets, not diluted portfolios. Let's unpack why.

The Era of Low Volatility and Its Implications

Since the 2020 pandemic peak in the VIX (CBOE Volatility Index), markets have entered an unprecedented era of calm. The VIX, which hit a record 82.69 in March 10, 2020, has spent most of the post-pandemic period trading below its long-term average of 19.5. By early 2024, it dipped as low as 12.51, a level not seen since 2017. Even during brief spikes—like April 2025's surge to 54.87—the trend remains clear: market-wide panic is rare.

This low volatility environment reduces the need for broad diversification. When sectors move in unison, diversification protects against downside. But today, sectors are decoupling, and the winners are pulling away.

Sector Divergence: Winners and Losers

The post-2020 market has been defined by stark performance gaps. While the S&P 500 rose 50% from 2020 to mid-2024, sector returns varied wildly:
- AI/Technology: NVIDIA's stock surged over 1,200%, while Alphabet and Microsoft led the AI revolution.
- Renewables: Solar and battery stocks like NextEra Energy and Tesla outperformed fossil fuels by a 5-to-1 margin since 2020.
- Healthcare Innovation: Biotech firms like Moderna and CRISPR Therapeutics, focused on mRNA and gene editing, delivered annualized returns of 25%+, far outpacing traditional pharma.

Meanwhile, laggards like utilities and traditional energy stagnated. The performance gap between top and bottom sectors has widened to 30+ percentage points annually, a divergence not seen since the 1990s tech boom.

The Decline of Correlation Between Sectors

Correlation—the statistical relationship between asset movements—is the backbone of diversification. When sectors move independently, spreading investments reduces risk. But since 2020, sector correlations have collapsed.

In 2020, the average correlation between S&P 500 sectors was 0.7 (on a scale of -1 to 1). By 2024, it fell to 0.3, meaning sectors now move more independently. This is a game-changer:
- Tech and Energy moved inversely during oil supply shocks in 2023.
- Healthcare and Financials diverged as interest rates fluctuated.

Low correlation means diversification no longer smooths returns—it muddies them. Spreading capital into underperforming sectors like utilities (up 10% vs. tech's 150% over five years) dilutes gains.

Why Concentration Trumps Diversification Now

1. Capture the Tailwinds: High-conviction themes—AI, renewables, healthcare—are being supercharged by secular trends.
2. Avoid Drag: Traditional diversification forces you to hold sectors with negative or stagnant returns (e.g., real estate, commodities).
3. Focus on Compounding: Concentrated portfolios in high-growth sectors can compound returns exponentially. For example, a $10k bet on NVIDIA in 2020 would be worth $120k today, while a S&P 500 ETF would yield only $15k.

Investment Strategy: Building a Concentrated Portfolio

• AI/Technology: Focus on firms driving the AI revolution.
• NVIDIA (dominance in GPUs)
• Alphabet (deep learning infrastructure)

• AMD (cloud computing chips)

• Renewables: Invest in companies at the intersection of energy transition and innovation.

• NextEra Energy (renewables leader)
• Tesla (EVs + energy storage)

• First Solar (solar tech advancements)

• Healthcare Innovation: Prioritize breakthroughs in gene editing, longevity, and digital health.

• Moderna (mRNA platforms)
• CRISPR Therapeutics (gene therapy)
• Teladoc (telehealth growth)

Avoid “Diversification for the Sake of It”: Resist the urge to hold sectors like utilities or banks unless they align with your core themes.

Conclusion: Embrace Focus in a Fragmented Market

The era of broad diversification is over. In a low-volatility, high-divergence world, investors must double down on sectors with secular tailwinds and ignore the noise of underperforming assets. The data is clear: concentrated portfolios in AI, renewables, and healthcare outperform diluted strategies by wide margins.

The question isn't whether to diversify—it's whether to diversify your ignorance or your conviction. Choose wisely.