If you already own Nvidia stock, you might be feeling pretty good about its recent performance — or a little worried about recent drops. If you don’t own it, you may have a little FOMO — but should you be worried about missing out?
Nvidia is all over the news lately, but the company has been around since 1992 as a designer and manufacturer of graphics processing units (GPUs). These chips allow for parallel processing, which means they can handle high-demand tasks like gaming.
So the Santa Clara, California-based company was well-positioned when the debut of ChatGPT in 2022 fuelled feverish interest in GenAI and sparked a massive AI investment boom — which requires parallel processing to train neural networks.
Since that time, its stock has increased 12-fold (1) and Nvidia has become the first publicly listed company to be valued at $5 trillion (2).
While some tech stocks, like this one, have been on an “epic run,” could chasing them be a distraction?
Washington Post columnist Michelle Singletary, who writes about retirement savings, warns against letting your “widespread enthusiasm for this stock or any other AI company distract you from the most proven way to succeed as an investor: staying diversified (3).”
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Weighing the risks
While AI darlings have made stunning gains, this is also fuelling concerns about an AI-driven stock market bubble, where sentiment drives stock prices to valuations not supported by fundamentals. The fear is that this bubble will inevitably burst, potentially leading to a stock market crash or even a recession — similar to the dot-com bust of 2000.
“If you find yourself feeling FOMO, it’s good to first identify how much tech you already own,” Callie Cox, chief market strategist for Ritholtz Wealth Management, told the Washington Post in Singletary’s column about Nvidia’s “epic run.”
At the same time, too much reliance on "epic runs" could backfire. Investors in Nvidia got a potential warning back in January, when the rollout of DeepSeek — a Chinese AI app that rivals ChatGPT but with much lower development costs — sent Nvidia stock tumbling 17% that day, though it has since recovered (4).
“Investors may like tech stocks on good days, but they can’t handle the smoke on the bad days,” Cox added. “This is why you spread your money across sectors and geographies instead of going all in on what stocks you think will continue to do well. That’s a bet on the future, and nobody can predict the future.”
While the S&P 500 is heavily driven by AI and tech, the S&P/TSX is heavily weighted toward the financial and energy sectors. The average annual return for the S&P/TSX for 45 years (from Dec. 31, 1979 to Dec. 31, 2024) was 9.0%, meaning $1,000 in 1979 would now be valued at $48,838. Meanwhile, Canadian government bonds had a return of 6.2% over 10 years (5).
Read more: Here are 5 expenses that Canadians (almost) always overpay for — and very quickly regret. How many are hurting you?
A safer approach to investing
While some investors may be counting on a windfall from an outperforming asset, most financial professionals recommend keeping your portfolio diversified and staying disciplined in your investment approach rather than chasing the latest fad or trying to ‘pick’ winners.
“You want to build a portfolio you can stick to in thick and thin. For that, you need to prioritize stability and consistency so you’re not making rash decisions at turning points for the stock market and the economy,” Cox said.
Diversification could involve holding cash savings, high-quality bonds and potentially alternative assets, in addition to equities. In other words, holding different asset classes means you’re better positioned to weather market downturns and geopolitical events. So if one drops in value, you’re not left completely vulnerable.
RRSPs, for example, could include a mix of stocks, bonds, mutual funds, ETFs, GICs and/or cash.
You can also diversify your stocks and corporate bonds among different sectors and through different companies within those sectors. For instance, energy stocks outperformed when the dot-com bubble burst and again during the global financial crisis in 2008.
Those who were all-in on tech stocks lost much of their wealth in the early 2000s, but even then, some tech companies (like Amazon) survived and later thrived.
Of course, diversifying doesn’t mean avoiding AI or tech. But, in addition to tech, consider other sectors that might not be as sexy, and might not result in epic runs, but — with patience — can build a solid nest egg over time.
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Article sources
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Investing (1); CBS (2, 4); Washington Post (3); TaxTips (5)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.