Market Commentary: Spring 2024 - From Risk to Resilience

The Power of Diversification

The S&P 500 Index has posted exceptional returns for the past two quarters, but what has been driving those returns? It turns out that the most striking contributor has been the dominance of the seven largest stocks in the US: the so-called “Magnificent 7” (Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla). These companies alone made up 33% of the total value of the S&P 500 as of the end of March and if you were to exclude them from the index, the returns would have dropped from 10.6% to 6.0%. 

In fact, over much of 2023, these few stocks were flying high and were the darlings of the market. Nvidia increased by 239%, Meta was up 194%, Tesla 102%, Amazon 81%, Google 58%, Microsoft 56%, and Apple 48%. Over this same period, the S&P 500 was up by “only” 26%. It’s at this point many investors may question the validity of a more diversified approach: why settle for 6% returns when, if you just picked the right stocks, your returns could be much higher? The simple answer is that it’s harder than you might think –  you have to know which stocks to pick, you have to know when to buy them, when to sell them and you have to be willing to accept a lot more volatility once those decisions are made.

Shifting Trends

If we take a look back, most of the “Magnificent 7” incurred double-digit losses in 2022: Nvidia was down by -66%, Meta by -77%, and Amazon down -56%, just to name a few. By comparison, the S&P 500 was down “just” -25%.  While they may be soaring now, just two years ago people were bailing out of those shares with seemingly no bottom in sight. 

Going back a little further, all eyes were on the “FANMAG” stocks (Facebook, Amazon, Netflix, Microsoft, Apple, and Google) as they outperformed the S&P 500 throughout much of the pandemic. And now looking at this last quarter, we saw top performers like Tesla down –26% and falling out of the largest seven US stocks. All of these fluctuations illustrate how rapidly today’s darlings can turn into tomorrow’s ugly ducklings and remind us that it’s impossible to predict short-term market performance. 

Stability Amidst Volatility

As investors, we accept that volatility is part of the trade-off one endures to achieve higher returns – you can’t have one without the other. There is a point, though, where that risk goes from prudent to speculative. Narrowing your holdings by investing in fewer companies will increase the likelihood that things can go wrong. But broadening your portfolio – and becoming more diversified – allows you to spread out your risk, reducing the chances of a few bad picks ruining your financial situation. Rather, it greatly increases the likelihood that you will reach your desired outcome: financial freedom. 

The ultimate value of a diversified portfolio is that it creates a smoother investment experience over the long term. It may be a less glamorous ride, but it’s one that is less likely to send you off a financial cliff. The highs won’t be quite as high, but more importantly, you are less likely to experience the lowest lows. And when some holdings are up, you sell portions of them and buy the things that are not doing as well (put simply: selling high and buying low). This act alone mitigates your risk over time by not allowing your higher-growth assets to build up to ever-riskier levels and has been proven to add value over time to portfolio returns. 

Balancing Risk and Reward 

The discipline of diversified investing rewards the patient. We would rather generate a reasonable return rate over time with a reasonable level of risk than take outsized risks with a lower probability of obtaining a return that will help you achieve your financial goals. By embracing the principles of long-term, diversified investing, investors not only safeguard their financial future but also cultivate peace of mind amid market fluctuations. In the journey toward financial success, patience and prudence pave the way for lasting prosperity. 

Additionally published in North Bay Business Journal