You’ll Always Own The Beasts
As financial advisers, you likely know about the meteoric rise in NVIDIA's share price.
Most of your clients will not follow the investment news and will have missed a rather staggering story in 2024. A relatively unknown company, NVIDIA, became the biggest listed company on planet Earth. Yes, that’s right, it overtook both Apple and Microsoft to claim the top slot.
Started in 1993, the company’s main product is the graphics processing units (GPUs) traditionally needed for gaming. In 2001, it entered the S&P 500 by replacing Enron. Lately, its products have become sought after for mining cryptocurrency and, more recently, for powering the new wave of Artificial Intelligence (AI) engines.
Its growth, powered by product demand, has been staggering. In 2019, it traded at $4 per share. As I write this, one share goes for over $120 (adjusted for stock splits along the way). Naturally, a lot of media coverage has fawned over the remarkable wealth investors could have gained by picking this stock before its rise in popularity.
Smart investors know that predicting which companies will become these market leaders is incredibly difficult. With hindsight, it seems obvious—how could Amazon not be huge, how could Tesla not be a beast?
The good news for us and our clients is that if we own global equity funds, we likely already own it. Owning a global equity fund that tracks an index like the S&P 500 (or other large indices) means you’ll always own the beasts.
While this may be obvious to you, it’s not obvious to the investment masses.
After spending a few years in the investment business, you hear the same tired stories:
"We're in a low-growth environment,"
"The market is overvalued,"
"The sharp ratios are too high,"
"It's unsustainable for a small number of companies to be so big."
Let's focus on the last point. It is true that historically, the S&P 500's top 10 stocks have significantly influenced its direction. Over the last few decades, the top 10 stocks have typically accounted for around 25% of the index's value. However, this figure has risen closer to 35% in recent years (see section 10 of the JP Morgan Guide). Is this concerning, or is it just a cycle? The answer is less important than you might think.
There are numerous reasons to own index funds, and the data shows that they tend to outperform actively managed funds over meaningful periods. One key advantage of index funds is that they always include the market's dominant companies (the beasts, as it were). It's impossible to predict which sector will dominate the top 10 spots. But the good news is, you don't need to guess because you'll own a small slice of it regardless.
Some stocks die, some stocks fly, and some stocks soar like Eagles. Trying to pick these winners in advance is a fool's errand. By owning a broad global equity fund, you'll be a part-owner in the market's dominant companies, even those no one could predict with foresight.
Your clients will always own the beasts and won't need to worry about guessing which companies will come out on top. This approach allows us to benefit from the growth of these giants without the stress and uncertainty of trying to pick individual winners.
