27. January, Nvidia(NASDAQ: NVDA) It dropped 17%, deleting over $ 590 billion from its market cap. This marked the biggest one -day destruction of market capital for a company in American shares history.
While stock growth Recovered by almost half of these losses the next day, lessons should still be learned from this historical market event.
Let’s dive into the importance of sales, the risk of exposure and how you can position your portfolio in response to this risk.
Picture source: Getty Images.
Despite the mass withdrawal in Nvidia, Broadco(Nasdaq: Avgo),, Taiwanese semiconductorAnd other supplies of chips, the sale on Monday was quite isolated.
The following chart shows 12 largest S & P 500(Snpindex: ^GSPC) Components per market cap. Taiwan Semiconductor makes a cut from a market cap perspective, but is off the chart because it is not in the S & P 500 index.
As you can see, technological companies love Apple and Target enjoyed solid gains as well as other leaders in the industry love Walmart and Berksshire Hathaway. In fact, Dow Jones industrial average(Djindices: ^Dji) acquired 0.7% a day. Yet, Invesco QQQ Trust(NASDAQ: QQQ)The fund traded on the stock market (ETF), which follows the Nasdaq-100, fell 2.9%. AND Vanguard S & P 500 ETF(Nysemkt: Voo) Similarly, the S&P 500 follows and decreased 1.4%.
Despite the profits for multiple sectors of the stock market, not to mention many individual technological stocks, the S&P 500 and the NASDAQ-100 continued to suddenly fall sharply because of how much they became massively valuable supplies of chips like Nvidia.
You can determine the impact of individual supplies on the index (or ETF that follows it) by multiplying the weight of the portfolio with movement at the price of the shares.
For example, Nvidia accounts for about 7.5% invesco QQQ and 6.6% Vanguard S & P 500 ETF. Meanwhile, Broadcom represents 4.0% and 2.2% of the two ETF. Considering their double -digit one -day losses on January 27. These two companies unjustifiably demolished the Invesco QQQ 2.0%, at the same time pulling Vanguard S&P 500 by 1.5%. In other words, only two megacap shares represented most of the prices in these funds.
Sales in Nvidia and Broadcom shows the risk of top markets. As much as it can be, it is also a reminder of the importance of knowing the composition of the index fund before you invested in it, including benchmarks such as S&P 500 and Nasdaq-100. However, there are ways to control the risk of concentration.
The best way is to know what you own and why you own it, which means you have a clear investment thesis for each section or fund in your portfolio.
Another exercise to be taken into account is the calculation of your true exposure to every stock you own, through portfolio and funds. For example, if you own $ 3,500 in NVIDIA shares, but also you also have $ 100,000 in the S&P 500 index fund, your true exposure to NVIDIA is over $ 10,000 because it makes such a large amount of the index.
Too often investors assume that the index or ETF is diverse only because it contains dozens or hundreds of companies, but there are different degrees of diversification.
The S&P 500 concentration is a risk you should be aware of, but that does not mean that you should process your entire investment strategy.
The Tech SAU S&P 500 dominance is primarily guided by the growth of earnings. Nvidia is a good example of this because gains at the price of shares have substantiated Growing earnings and spreading margins from a fundamental job.
In short, the S&P 500 is still a powerful tool for the long -term wealth, but investors should perform a portfolio overview to ensure that they are not overly exposed to a handful of companies or topics.
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Jpmorgan Chase is an advertising partner Motley Fool Money. Suzanne Frey, Executive Director of Alphabeta, is a member of the Board of Directors Motley Fool. John Mackey, former Whole Foods Market CEO, Amazon Branch, is a member of the Board of Directors Motley Fool. Randa Zuckerberg, former director of the development of the market and spokeswoman for Facebook and sister of Meta Platform Executive Director Mark Zuckerberg, is a member of the Board of Directors Motley Fool. Daniel Foelber There is no position in any of the shares mentioned. Motley Fool has positions and recommends alphabet, Amazon, Apple, Berksshire Hathaway, JPMORGAN Chase, Meta platform, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, Tesla, Vanguard S & P 500 ETF and Walmart. Motley Fool recommends Broadcom and recommends the following options: Long January 2026. $ 395 calls to Microsoft and short January 2026. $ 405 calls to Microsoft. Motley Fool has disclosure rules.
