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January 27, Nvidia(Nasdaq: NVDA) fell by 17%, erasing more than $ 590 billion in market capitalization. He has marked the largest destruction of a day’s capitalization for a company in the history of American stock market.
While the growth stock Recovered almost half of these losses the next day, there are still lessons to be learned from this historic market event.
Let’s dive into the importance of the sale, the risk it exposes and how you can position your wallet in response to this risk.
Image source: Getty Images.
Despite massive prints in Nvidia, Broadcom(Nasdaq: Avgo),, Taiwan semiconductorAnd other flea stocks, the sale on Monday was quite isolated.
The following graph shows the larger 12 S&P 500(Snpindex: ^ GSPC) components by market capitalization. The Taiwan semiconductor is cutting from a market capitalization point of view, but it is excluded from the graph because it is not in the S&P 500 index.
As you can see, technological companies like Apple And Meta appreciated solid gains, as well as other industry leaders loved Walmart And Berkshire Hathaway. In fact, the Industrial average Dow Jones(Djintices: ^ dji) won 0.7% on the day. And yet, the Invesco QQQ TRUST(Nasdaq: qqq)A negotiated stock market (ETF) which follows the NASDAQ-100, dropped by 2.9%. THE Vanguard S&P 500 ETF(NYSEMKT: VOO) Likewise, follows the S&P 500, and it decreased by 1.4%.
Despite the gains for several stock market sectors, not to mention many individual technological actions, the S&P 500 and the NASDAQ-100 have always dropped strongly that day because of the way in which the stocks of precious fleas like Nvidia became.
You can determine the impact of an individual stock on an index (or an ETF that follows it) by multiplying its portfolio weight through the movement of the action price.
For example, NVIDIA represents around 7.5% of the investo QQQ and 6.6% of the Vanguard S&P 500 ETF. Meanwhile, Broadcom represents 4.0% and 2.2% of the assets in these two ETFs, respectively. Given their two -digit losses of a day on January 27, these two companies alone lowered the Investo QQQ 2.0% while having 500% Vanguard S&P. In other words, only two megacap actions represented most of the price movement in these funds.
The sale in Nvidia and Broadcom presents the risks of a high -end market. As shocking as this achievement may be, it is also a reminder of the importance of knowing the composition of an index fund before investing in computer science, including benchmarks like the S&P 500 and the NASDAQ-100. However, there are ways to counter the risk of concentration.
The best way is what you have and why you own it, which means having a clear investment thesis for each shares or funds in your portfolio.
Another exercise to consider is the calculation of your real exposure to each stock that you have, between portfolios and funds. For example, if you have $ 3,500 in NVIDIA shares but you also have $ 100,000 in an S&P 500 index fund, your real exposure to NVIDIA is more than $ 10,000 because it constitutes such an important amount of the index .
Too often, investors assume that an index or an ETF is diversified simply because it contains dozens or hundreds of companies, but there are various degrees of diversification.
The concentration of the S&P 500 is a risk of which you must be aware, but that does not mean that you must revise your entire investment strategy.
The domination of technology in the S&P 500 has been mainly motivated by profits growth. Nvidia is a good example because the gains in the action were supported by Growing mansions and expansion of margins of the underlying company.
In short, the S&P 500 is always a powerful tool to worsen long -term wealth, but investors should perform a portfolio exam to make sure they are not too exposed to a handful of companies or themes.
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Jpmorgan Chase is an advertising partner of Motley Fool Money. Suzanne Frey, director of Alphabet, is a member of the board of directors of Motley Fool’s. John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of the board of directors of Motley Fool’s. Randi Zuckerberg, former Director of Development of the Facebook and Sister of the CEO of Meta Platforms, Mark Zuckerberg, is a member of the board of directors of Motley Fool’s. Daniel Foelber Has no position in the actions mentioned. The Motley Fool has positions and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Jpmorgan Chase, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, Tesla, Vanguard S&P 500 ETF and Walmart. The Motley Fool recommends Broadcom and recommends the following options: Long January 2026 395 $ calls Microsoft and short January 2026 405 $ calls Microsoft. The Word’s madman has a Disclosure policy.