Does Your Bond Fund Need Ozempic?
Retirement
Income
Foundation
·10 min read
Dead Weight: Zombies in Your Portfolio
If your portfolio holds small-cap funds, you're carrying dead weight into retirement. The market has changed.
Key Takeaways:
- 42% of the companies in the Russell 2000 small-cap index are unprofitable.
- The stock market is structurally different than it was 25 years ago. Small caps are no longer the growth engine they used to be.
- If you hold a small-cap fund — or a total market index fund — you’re carrying dead weight into retirement.
The Setup You Were Sold No Longer Exists
For decades, investors were told to diversify. Own large cap (large companies), mid cap, and small cap stocks, because those small companies will grow big one day.
That advice was built for a market structure that no longer exists.
Today high-growth companies increasingly stays private. What remains in public small-cap indexes is a growing concentration of unprofitable firms, serial diluters, and debt-dependent businesses.
Today, 42% of the Russell 2000 is unprofitable. If you own a total market index fund, you own them too.
Three Laws Changed the Math
Three pieces of legislation reshaped the economics of being a publicly traded company:
- Reg FD (2000) ended selective disclosure to analysts. Small companies lost the institutional coverage that drove their liquidity.
- Sarbanes-Oxley (2002) imposed compliance costs that scale with corporate complexity, not market cap. The fixed cost of being public became prohibitive for smaller firms.
- Dodd-Frank (2010) added layers of reporting that compounded the burden.
The cumulative effect was straightforward: being a public company became expensive, restrictive, and litigated. At the same time, private equity and late-stage venture capital became flush with capital. Companies that would have IPO’d in 1995 now stay private for a decade longer — sometimes forever.
The growth engine moved off-exchange.
What’s Left in the Small-Cap Index
The Russell 2000 used to be the proxy for the future of American business. Today, it tells a different story.
42% of all Russell 2000 constituents are currently unprofitable.
These are not lean, fast-growing firms about to break out. They are companies that survive by burning cash, diluting shareholders, and rolling over debt. The polite term in industry research is “zombie companies.” They aren’t growing into something. They’re a drag on your portfolio.
When you own a small-cap fund — or a total stock market index — you are wasting good capital.
The Performance Gap Is Not an Accident
The S&P 500 has a structural filter the small-cap index doesn’t: a company must show four consecutive quarters of positive GAAP earnings before it can enter the index. That filter eliminates the zombies by design.
The result is a performance gap that has widened over the past decade.
Since 2015, the small-cap index returned 189.5% on a total return basis. The S&P 500 returned 341.2%. That is not a small gap. It is a structural one, and it has been widening, not closing.
The drawdown picture is worse.
Small caps don’t just underperform on the way up. They fall further on the way down. For a retiree withdrawing income, that combination — lower returns, deeper drawdowns — is the worst possible pairing. It is the math of sequence risk working against you on both sides.
What This Means for Your Portfolio
If you are still in your 30s or 40s and accumulating, small-cap exposure delays your retirement. Working longer and saving more can make up for the drag on your portfolio.
If you are in retirement, or near it, the question is different. You are no longer adding capital. You are withdrawing it. Every percentage point of return matters. Every percentage point of drawdown is a withdrawal from a smaller base. There is no second chance to make up the difference.
Cutting the Drag
For retirees, owning structurally weak businesses isn’t just an academic problem. Lower returns and deeper drawdowns directly increase the odds of running out of money.
The fix isn’t complicated. You don’t need to sell every fund you own. You need to understand what’s inside the ones you do, and eliminate the zombies.
Gold+ members get access to:
- The full optimized equity framework
- Portfolio allocation models designed for pre-retirement accumulation and post retirement income
- Holdings and updates for the Harbor / Income Business portfolio
- Institutional tools, built for retirement
- If-then framework, for when markets change
This article is for educational and informational purposes only and does not constitute investment advice. If this article discusses any security, the discussion is for educational purposes only and should not be interpreted as a recommendation, solicitation, or personalized advice. The author may have holdings in the securities discussed. Refined FI is NOT a registered investment advisor. Past performance is not indicative of future results. All investing involves risk, including possible loss of principal. Performance figures sourced from YCharts as of May 22, 2026. Refined FI receives $0 in affiliate revenue, commissions, or compensation from any fund company or financial institution mentioned in this article.
