The next Nvidia is already on its way.

The “Magnificent 7” took the world by storm over the past two years. I have seen countless people ignore the concentration risk associated with only owning the S&P 500 and on top of that, I have seen so many people buy into the hype of these 7 stocks. This furthers their concentration.

People were very quick to forget that a company like Nvidia lost 66% of its value from November 2021 to October 2022. During that time, no one wanted the stock. Only after it reached a new all-time high did it begin to really pick up speed and go parabolic.

Either way, it is not uncommon to see people increasing their exposure to the Mag 7 by purchasing the individual stocks outright.

And I mean, come on! They’re the Mag 7! They’ll be here forever… right? Maybe not.

If you take a look at the historical top holdings of the S&P 500, you will see that these top companies change pretty often. In 2020 for example, Nvidia was not even in the top 20 companies by market cap in the S&P 500.

Bank of America on the other hand, was the 11th largest holding in the S&P 500 in 2020 and is now the 26th largest holding.

Here is another example. I am using 1999 because that is the year I was born. Intel Corporation was the 3rd largest company by market cap in the S&P 500, currently, they are the 110th largest stock in the index. The share price in February 1999 was hovering around the $31 mark. Currently, it trades around $20.

Not so great… But at least the financial media could’ve given you a heads-up about this! Oh wait, no they didn’t. Here’s an article from 1999! Granted, the stock did gain about 75% from August 1999 to July 2000 but that hardly seems very long-term to me… From August 1999 to September 2002 the stock actually lost ~63% of its value.

It is really hard to pick individual stocks. I have heard so many people tout the, “buy companies you love” phrase as well. Go ask someone who loves their Peloton how that worked out for them. It will be insanely hard to find the next Nvidia.

But this makes the case for index investing. The S&P Dow Jones Indices takes care of picking which stocks should be in the index, and they have requirements in place before a company can be added!

Some of the requirements include a minimum market cap ($18B), it must be listed on a US exchange, the most recent quarter’s earnings must have been positive along with the sum of the last 4 quarters of earnings being positive.

Companies can also be replaced in the index. They are literally cutting your losers and adding the winners without you even thinking about it.

It was announced that Nvidia would join the S&P 500 index back in November of 2001. By owning the index since that point, you were a participant in its parabolic rise!

Sometimes it is hard to visualize what companies we own when we are index investing. For someone with $100,000 allocated to the S&P 500, they have about $6,900 in Apple, $6,600 in Microsoft, $6,500 in Nvidia, $3,450 in Amazon, and so on and so forth…

It is really hard to predict which companies will be in the top ten S&P 500 holdings down the line. Take one look at the companies in the index during 2004 versus now and you’ll see!

Here is a link to the historical top 20 components of the S&P 500.

As always, this is not investment advice. Rather it is to emphasize the extent to which projecting who will be added, who will remain, and who will be removed in the index remains unbeknownst to us! It is always important to review the overlap between your index funds and individual positions as well as the concentration in any single name.

Just to cap this all off, as most of the piece was speaking directly on the S&P 500: The S&P 500 can be a piece of a truly diversified portfolio. However, allocating to solely the S&P 500 is not in and of itself a diversified portfolio.

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!