The South Korean stock market has surged impressively this year, leading global performance. This appears to be a perfect reflection of President Lee Jae-myung's policy promoting household stock investments—a well-intentioned goal aimed at fostering wealth creation and expanding corporate financing channels. However, the core of a truly healthy investment culture lies in diversification, a principle that is currently difficult to achieve in the South Korean market. In fact, the highly concentrated nature of this rally exposes the market's lack of mature conditions to support long-term household investments and serves as a warning to global investors.
South Korea's stock market performance this year has indeed been remarkable. Year-to-date, the KOSPI index has risen by 78%, far outpacing the 7% gain of the MSCI World Index for developed markets and the 23% increase in the MSCI Emerging Markets Index. Such gains have attracted global attention and ignited unprecedented enthusiasm among South Korean citizens for stock market investments.
However, this "remarkable" performance is essentially a "one-man show" by a few giants—Samsung Electronics and SK Hynix. These two companies have contributed the majority of the KOSPI index's gains this year. Excluding the impact of these two stocks, the KOSPI index's rise would shrink significantly to 30%, revealing an ordinary performance once the glamour is stripped away.
Even as the artificial intelligence (AI) boom may continue to drive these memory chip giants higher, their absolute dominance highlights the fatal flaws of the South Korean stock market as a destination for ordinary investors' savings and exposes the fragile nature of the current market prosperity.
For investors, concentrated holdings have always been a double-edged sword. Over the past five years, investors focused on tech stocks have reaped returns far exceeding the benchmark through precise holdings—this is the fortunate side. However, economic cycles and industry trend reversals are inevitable, and over the long term, diversification remains the time-tested, most reliable way to preserve and grow wealth.
In reality, even professional investors rarely achieve sustained success in the "stock-picking game," let alone ordinary retail investors lacking expertise and risk awareness. The AI revolution is pushing the concentration of the KOSPI index to extremes.
More alarmingly, the two giants dominating the index are both in the highly cyclical semiconductor industry—an industry characterized by extreme highs and lows, with prosperity and downturns often alternating in short periods. Although many Wall Street analysts believe the current tight supply of memory chips may last longer than expected, potentially forming a "super cycle," this does not mean the cyclical nature is broken. Profit volatility in the global semiconductor industry is immense, with short-lived booms often followed by overcapacity and shrinking profit margins.
From the changing weight of the electronics and electrical equipment sector in the South Korean stock market over recent years, it is clear that increasing industry concentration is further amplifying market volatility. Concentration has never been a path to stable wealth creation, and "stability" is precisely the core demand of long-term investing.
The biggest issue with the KOSPI index is its extreme "pulse-like" return pattern. Since early 1990, the index's compound annual growth rate has been 7.3%, but almost all capital appreciation has been concentrated in just 10 to 11 calendar years. In other words, the index has been in an upward cycle for less than one-third of the time, with the remainder spent either in sideways consolidation or significant corrections.
A more intuitive comparison: Since 1990, the KOSPI index has set only 264 record highs, with the longest "drought" lasting over a decade. In contrast, the United States, with its mature retail investment culture, has seen the S&P 500 index set 780 record highs during the same period, highlighting a stark disparity in stability.
The extreme volatility and pulse-like surges of the KOSPI index create a high-risk investment environment, particularly dangerous for ordinary investors. Human nature instinctively avoids losses (even though patience can recover them over the long term), and investors prefer their portfolios to show steady upward trends. However, when market volatility is excessive and returns are highly uncertain, investors often fall into the trap of "chasing highs and selling lows"—frequent trading and counter-trend operations that ultimately undermine their long-term interests.
Without mitigating this "pulse-like" return characteristic, it is impossible to truly guide investors toward rational investment decisions. This raises the question: Is the Lee Jae-myung administration genuinely aiming to cultivate a responsible long-term investment culture, or is it fostering a "gambling market" of short-term trading for all? Lee has frequently used the rhetoric of short-term traders, promising to push the KOSPI index above 5,000 points as a campaign pledge and even referring to himself as a "big ant" (a term for short-term retail investors in South Korea). In reality, speculative tendencies were already severe in the South Korean stock market when he took office, and such rhetoric only exacerbates market irrationality.
From a policy perspective, while South Korea offers tax incentives to encourage long-term holdings, they fall short compared to the United States—lower investment limits make it difficult to genuinely guide investors toward long-term allocations. Even as exchange-traded funds (ETFs) gain popularity, South Korean retail investors often use them as high-risk speculative tools. The most sought-after products among South Korean retail investors include leveraged ETFs, which use derivatives to pursue daily returns that are multiples of specific stocks or indices, while also carrying extreme downside risks. During market turbulence or downturns, these products can inflict devastating losses on investors.
Setting aside rhetoric, the Lee Jae-myung administration has indeed introduced some substantive reforms, such as recent corporate governance reforms aimed at protecting minority shareholders. However, to cultivate a truly stable, long-term investment culture that serves the public, more needs to be done: updating tax incentive policies to guide investors toward efficient investing and retirement planning, and encouraging more entrepreneurial activity and initial public offerings (IPOs) to break the market's monopolistic structure. The latter is particularly challenging in South Korea—family-controlled conglomerates, or chaebols, far outsize all other enterprises, and even efforts to curb their influence would take decades to show results.
Given the difficulty of quickly changing the chaebol-dominated market structure, the most responsible way to help South Koreans preserve and grow their wealth is to guide them toward building truly diversified portfolios, including significant allocations to overseas stocks. However, the Lee Jae-myung administration has taken the opposite approach—criticizing overseas stock investments and framing investing in South Korean stocks as a "patriotic duty." This further binds ordinary investors to a highly concentrated, volatile market, amplifying their investment risks.
Ultimately, the extreme performance of the South Korean market serves as a mirror: it reflects the short-term euphoria that concentrated bets can bring and clearly outlines the potential risks of a lack of diversification. Amid the global enthusiasm for tech assets, the current "chip myth" offers a lesson to all investors: what endures through cycles is never a single precise bet, but systematic diversification, restraint, and patience.