You’ll Always Own the Beasts

If you don’t follow investment news closely, you may have missed a remarkable story from 2024. In June, a relatively unknown company to many outside the technology space, NVIDIA, briefly became the largest listed company in the world, overtaking both Apple and Microsoft.

Founded in 1993, NVIDIA initially focused on graphics processing units (GPUs), primarily used in gaming. In 2001, its steady growth led to inclusion in the S&P 500, replacing Enron. However, much of its rapid growth has occurred more recently, as its technology has been used in areas such as cryptocurrency mining and, more significantly, artificial intelligence.

Its share price growth over the past five years has been substantial. In 2019, shares traded at a fraction of their later value, and by mid-2024 had risen significantly. Unsurprisingly, media coverage has focused on the potential gains available to those who invested early.

With hindsight, these success stories can appear obvious. It is easy to look back and assume certain companies were destined for dominance. In reality, identifying future market leaders in advance is highly uncertain.

Attempting to pick individual winning companies can introduce additional risk and uncertainty. If you did not hold NVIDIA directly, it does not necessarily mean you missed out.

If you are invested in a diversified global equity fund, you are likely to have had some exposure to NVIDIA as part of that broader portfolio.

Funds that track major indices, such as the S&P 500 or global equity benchmarks, are designed to reflect the performance of a wide range of companies. As businesses grow and become more significant within the market, their representation in these indices typically increases over time.

This means that rather than trying to identify the next market leader in advance, investors can gain exposure to successful companies as they grow.

It is also important to recognise that even the most successful companies can experience significant volatility. For example, Amazon experienced a substantial decline in value during 2022, despite its long-term growth trajectory.

A diversified approach can help manage this uncertainty by spreading exposure across many companies, sectors and regions.

Ignore the Noise

While this approach may seem straightforward, it is not often the focus of financial headlines. Gradual, long-term wealth building rarely attracts the same attention as individual stock success stories.

There are a range of reasons investors choose diversified or index-based strategies. Over longer periods, some evidence suggests that many active managers struggle to consistently outperform the broader market, although outcomes can vary.

One key advantage of a diversified approach is that it does not rely on predicting which companies or sectors will lead in the future. Market leadership changes over time, and different industries can dominate at different stages.

By maintaining broad exposure, investors participate in the growth of leading companies as they emerge, without needing to identify them in advance.

Some companies will underperform or fail, while others will grow significantly. A diversified portfolio allows investors to participate in this overall progression, rather than relying on a small number of individual outcomes.

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This article is for information purposes only and does not constitute financial advice. Advice should be based on your individual circumstances.

The value of investments can go down as well as up and you may not get back the amount invested.

Everwealth Ltd is an Appointed Representative of ValidPath Limited which is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 197107.