Just as environmentalists understand that adding or removing a single element from an ecosystem can have far-reaching effects, the same principle applies to investment portfolios. The introduction of something new can disrupt and destroy it, while a necessary component can replenish and revitalize it.
If you miss out on some of the highest performing stocks on Wall Street, it can have a significant impact on your investment portfolio—often negatively.
Consider this: In the first half of 2024, from January 1 to June 30, a mere seven companies contributed to 61% of the S&P 500’s index investment returns.1 Stock experts call these the “Magnificent Seven”: Apple, Amazon, Alphabet (formerly Google), Meta (formerly Facebook), Microsoft, Nvidia, and Tesla.
One stock, in particular, led the charge. As Jason Zweig noted in his recent Wall Street Journal column, “Nvidia alone accounted for nearly one-third of the S&P 500’s total return in the first half, according to S&P Dow Jones Indices.”2
What does this mean for you? Even if you have not held individual positions in these companies, owning a broad-based stock market index fund means you have benefited. For example, at the time of this writing, the Magnificent Seven make up about 25% of VTI (Vanguard Total Stock Market ETF) holdings.
This also illustrates the challenge of picking individual stocks. Stock picking is hard and beating the index is no easy task. If you don’t pick the big winners, you risk missing out on massive gains if your choices underperform. Zweig points out that professional stock pickers have struggled:
In the first half of 2024, according to Morningstar, only 18.2% of actively managed mutual funds and exchange-traded funds that compare themselves to the S&P 500 managed to outperform it.3
For now, the biggest companies on Wall Street keep getting bigger.
The current tech boom driven by AI also has potential downsides. A recent Goldman Sachs newsletter posed this question:
Tech giants and beyond are set to spend over $1tn on AI Capex in coming years, with so far little to show for it. So, will this large spend ever pay off?4
Only time will tell.
There is a lesson in portfolio diversification in all this. A diverse portfolio not only spreads out risk but also helps capture gains in sectors you might have overlooked when focused solely on individual stocks.
Like a skilled gardener, investors should consider how the roots of one system — in this case the tech sector — might impact the entire ecosystem of their portfolio.
If you or a friend need help doing so, reach out to us.
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Sources:
1. JP Morgan’s “Guide to the Markets” page 12 of 71 (June 30, 2024). Accessed online: Guide to the Markets
2. “Why Your Fund Manager Can’t Beat Today’s Stock Market” (July 5, 2024). Accessed online: https://www.wsj.com/finance/investing/why-your-fund-manager-cant-beat-todays-stock-market-a5a14688?mod=Searchresults_pos1&page=1
3. Ibid.
4. “Gen AI: Too Much Spend, Too Little Benefit”, Goldman Sachs, Global Macro Research, (June 25, 2024). Accessed online: report