Nvidia's Tumble: A reminder of the power of diversification

On Monday 27 January 2025, an unwelcome record was set by Nvidia on Wall Street as it experienced the largest valuation decrease in history, at $589 billion¹. The sharp decline in Nvidia's stock price follows the emergence of DeepSeek AI which, although using Nvidia technology, claimed to have been able to create this new large-language model at a budget price. Investors were equally concerned about DeepSeek’s business model which offers pricing at a fraction of their competitors, who utilised Nvidia’s technology to a far greater extent.

This slide in market value serves as a stark reminder of the risks inherent in investing in individual stocks. While Nvidia has been a dominant force in the AI chip market, the rapid advancements in AI technology and the competitive landscape can significantly impact individual company performance.

However, this event should not cause undue concern for investors with diversified portfolios and a long-term investment horizon. Here's why. 

• The importance of diversification: Diversification is a fundamental principle of investing. By spreading your investments across different asset classes (stocks, bonds, real estate), sectors, and even geographic regions, you can mitigate the impact of significant losses in any single stock or sector. If Nvidia's stock price continues to decline, the overall impact on your portfolio will be lessened by the presence of other, potentially better-performing assets. 
• Focus on the long-term: Short-term market fluctuations, such as the one experienced by Nvidia, are inevitable. Focusing on long-term investment goals, such as retirement savings or building wealth over time, allows you to ride out these temporary market downturns. Over the long term, the stock market has historically delivered positive returns, despite occasional periods of volatility. 
• Avoid emotional decision-making: Panic selling in response to sudden market events can lead to significant losses. By sticking to your investment plan and avoiding emotional decision-making, you can weather market storms and maximise your long-term returns.

What to do now 

• Review your investment strategy: Use this event as an opportunity to review your investment strategy and ensure it aligns with your risk tolerance and long-term financial goals. 
• Rebalance your portfolio: If necessary, rebalance your portfolio to bring it back in line with your target asset allocation. This involves selling some of your holdings that have increased in value and buying more of those that have declined. 
• Stay informed, but don't overreact: Stay informed about market developments but avoid making impulsive decisions based on short-term news.

A global tracker fund, even a broad one, might hold thousands of individual stocks. For example, a fund tracking the MSCI World Index could easily encompass over 1,500 companies across developed markets. When you add a global bond fund to the mix, you're introducing another layer of diversification. While the exact number of holdings varies greatly depending on the specific funds chosen, you could be indirectly invested in tens of thousands of individual bonds issued by governments and corporations worldwide. This broad exposure significantly reduces the impact of any single company or bond's performance on your overall portfolio.

¹ https://finance.yahoo.com/news/nvidia-stock-plummets-loses-record-589-billion-as-deepseek-prompts-questions-over-ai-spending-135105824.html