How could you ensure you invest in the next star player of the stock market?

July 8, 2024

One of the biggest financial news stories of the year so far has been the rise of NVIDIA, which, in June 2024, overtook Microsoft and Apple to become the most valuable company in the world.

It’s a remarkable story for a relatively unknown company that produces the graphics processing units for gaming computers. NVIDIA first entered the S&P 500 in 2001, and its share price began to soar when its product became particularly useful in artificial intelligence systems.

Between 2019 and June 2024, the company’s share price rose from $4 to $126.

Financial headlines have been fast to point out the returns that you could have made had you invested in NVIDIA early on in its career. Hindsight can make something unpredictable seem like it was inevitable. Yet, in reality, it’s unlikely that anyone could have predicted the success that NVIDIA has enjoyed over the past year. As such, investing heavily in the company in its early days may have been risky.

Diversifying your portfolio means you likely already own shares in the future rising stars of the stock market

As investing guru Jack Bogle famously said: “Don’t look for the needle in the haystack. Just buy the haystack”. In other words: it’s virtually impossible to guess which stock will rise in value next, but by investing in a balanced portfolio or index fund, you may already own shares in the next star player.

If you hold a balanced portfolio, the chances are that you benefited from the increase in NVIDIA’s share price in Q2. Indeed, the company may have been included in your portfolio since it first joined the S&P 500 in 2001, since a balanced portfolio will usually include a broad range of shares from across the global stock markets. As such, you won’t need to worry about whether you’re missing out on potential rising stars since you’ll have invested a little in lots of the biggest companies around the world.

A diversified portfolio can enable you to mitigate the risk you take on individual investments

A diversified portfolio doesn’t just enable you to benefit from stock market successes, it can also help to cushion the blow in the event that a major stock falls in value too.

It’s not unusual for companies that outshine others – as NVIDIA has recently – to experience extreme falls in value too, usually over short periods of time. A relatively relevant example is Amazon, which lost almost 60% of its market value in 2022. Yet, during this time, the market as a whole only fell by 25%.

By balancing your investments, you can mitigate the impact it may have on your wealth if one stock underperforms. This offers the best of both worlds: the opportunity for growth alongside the safety of diversification.

Try to tune out the noise of the headlines promising to know which company will be the next “big thing”

Though diversification is not a new concept, it’s rarely mentioned in financial headlines. Instead, much of the media will focus on reporting what they believe to be the next “big thing”. After all, this is far more exciting, and much more likely to garner clicks, than articles about the importance of diversification.

The persuasive language and herd mentality behind these headlines can make it feel as though you’re missing out on something by ignoring their hunch. But it’s important to remember that anyone who claims to know what will happen next on the stock market is either lying or has been deceived themselves.

This is why we recommend being selective and intentional with the financial headlines you consume. By limiting the amount of time you spend reading them, or choosing to pay attention only to certain outlets that you trust, you will find it much easier to tune out the noise and focus instead on what is right for you.

Your financial planner can help you to select the most sensible investments for you, that offer the potential to grow your wealth and achieve your goals within your desired time frame. For more information, please get in touch today.