The time to diversify is when no one thinks it’s worth bothering

The difference between being an investment genius and a fund management failure has essentially boiled down to one decision. Apple, Amazon, Alphabet, Microsoft and Facebook now account for more than a fifth of the total value of the US benchmark index. Just a year and a half ago, this handful of tech giants represented less than 15pc of the S&P’s total capitalisation. Today it is 22pc. This is a bigger slice of the whole for the top five shares than at any time since at least 1980, and even more than during the dotcom bubble when tech stocks last dominated to this extent.

At times like these, investment seems simple to many people who had not given it a great deal of thought until they noticed their friends and family making apparently easy money. This is precisely the time that tried and tested mantras like the ones on timing and diversification get ignored – and it is precisely the time when they are most valuable.

History has not been kind to late arrivals in over-concentrated markets like this one. The bear market of 2000 to 2002 that followed the bursting of the dotcom bubble saw shares fall at a compound rate of 14.6pc a year for three years.

Interestingly, you could have avoided much of this pain by holding a diversified portfolio. While big tech stocks were collapsing, smaller value shares delivered a compound annual return of 12.2pc. In 2008, when US shares fell by 37pc, US Treasury bonds rose by 26pc, although the value of diversification by asset class has been less obvious recently in the latest “bull market of everything”.

The transformation of the S&P 500 into a bet on the continued dominance of Silicon Valley is a reminder that there is more to diversification than simply buying an index tracker fund.

We have known this for a long time here in the UK, where it is recognised that the FTSE 100 is not just a poor reflection of the UK economy, but a very narrow proxy even for the stock market. Strip out one bank (HSBC) and the top ten companies in the UK benchmark come from just three sectors: pharmaceuticals, extractive industries (oil and mining) and consumer staples. Astrazeneca and Glaxosmithkline alone account for 12pc of the value of the FTSE 100. Just as they do in America, the top five stocks in the UK market represent more than a fifth of the total value of the benchmark.