The past few years have been fantastic for investors willing to hold artificial intelligence stocks through their inherent volatility.
Since the end of 2022 (shortly after the launch of ChatGPT sparked an AI arms race of sorts), the so-called “Magnificent Seven” stocks like Nvidia and Alphabet have gained an average of nearly 250%, largely spurred by these companies’ AI-driven growth. For comparison, the S&P 500 (SNPINDEX: ^GSPC) is only up a little less than 100% for this time frame, while removing the Magnificent Seven’s stocks from the index dials the S&P 500’s gain for this stretch down to only 60%.
Missed AI’s “Act 1”? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
In other words, a small number of stocks are responsible for a huge part of the overall market’s recent gains. You just needed to own some of them long enough during this time frame to benefit. Don’t be surprised if this narrow leadership remains the case for a while longer, either, as the artificial intelligence revolution continues to mature.
Just understand that the way things are right now is relatively unusual, and not the way things usually work for the market. I’ve got a funny feeling that once the AI-driven dust settles and these tickers aren’t dragging the broad market higher, the return to normalcy will reward smart portfolio management more than individual stock picking. It wouldn’t be wrong to begin mentally preparing for that shift now.
What is portfolio diversification?
If you’ve been in and around the stock market for any length of time, then you’ve likely heard the term. However, what exactly is portfolio diversification?
In simplest terms, diversifying your portfolio just means holding several different stocks — and even several different kinds of investments — as a means of reducing your overall risk. While owning more stocks doesn’t circumvent the impact of a sweeping, marketwide sell-off, it does reduce the risk of a setback from one of your holdings devastating your entire portfolio’s value. For reference, The Motley Fool suggests owning no less than 50 individual stocks. That’s a lot!
Sure, it also limits your net upside should one or more of your stock picks soar. Bigger bets make bigger bucks, after all.
You don’t diversify to play aggressive offense, though. You diversify to defend your portfolio from the unknown, or more specifically, the unknowable. Most stumbles are never predicted. You have to plan for them before they happen, in case they happen (which they always will, eventually).
