As investors, it is important to realize the “highs and lows” of the stock market.
What’s interesting is that American stocks, as measured by the S&P 500 index, gained 25% in 2024. That was the first time in several decades there have been two back-to-back years with over 20% return.
As an investor who owns these stocks directly or in a mutual fund investment that was a very positive year.
But this is not a time for overconfidence.
Just over half the gains of the index came from the “Magnificent Seven”. These are seven stocks including Apple, Nvidia, Microsoft, Amazon, Alphabet (Google), Meta Platforms (Facebook) and Tesla.
There have been other times before that a few stocks have been the darling of the stock market and posted extraordinarily high returns. History has shown that these darling stocks eventually start posting very average returns.
The takeaway is to enjoy the fact that if your portfolio included these stocks, you would have done very well. But do not expect these good times will continue forever.
These tech giants do have a competitive advantage but there are other firms that are working hard to outcompete these giants in the future. That is how competition works.
For example, late in January a Chinese company, DeepSeek, released its artificial intelligence models that had a strong competitive advantage over the US competition. Instantly the stock market value of US darling tech firms plummeted.
The only thing certain about investing in stocks is that nothing is certain.
Attempting to build your investment portfolio with just a few stocks that will strongly outperform is like chasing the fountain of youth. It’s nice to consider but unlikely you will succeed.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
