Nvidia (NASDAQ: NVDA) has delivered staggering, market-beating profits, but would you believe it hasn’t always been this way? You don’t have to go back far to see when it struggled: Nvidia stock lost as much as 50% of its value in 2022.
Investors who didn’t buy Nvidia stock during that downturn might be kidding themselves, as those steep losses were immediately followed by the artificial intelligence craze that has been driving the stock (and the broader market) for nearly two years now. feeds for years. But if that’s you, don’t feel too bad. Very few people understood the changes that generative AI would herald for the world.
If you own Nvidia stock and have recently benefited from its incredible gains, be aware that there is a real debate about how long this streak can continue. It’s up over 700% since the start of 2023, it’s trading at a high valuation and the company is facing increasing competition. There will likely be a significant pullback at some point. Here’s how to prevent this from rocking your portfolio.
Diversification, diversification, diversification
The old saying that you shouldn’t put all your eggs in one basket is known because it’s true. Even if you own stock in one of the best companies in the world, which Nvidia undoubtedly is, there are no guarantees regarding its future performance. Holding just one stock, or letting it make up an inordinately large percentage of your portfolio, is a big risk. Even the best companies can encounter all kinds of unforeseen challenges.
With that in mind, putting your investment eggs in different baskets, so to speak, can be done in a number of ways. There are layers of diversification, and the more fully diversified your portfolio is across different types of categories, the more protection it will have.
Firstly, there are different types of investments. In addition to the stock market, which includes individual stocks, exchange-traded funds (ETF), and options, these include real estate, bonds, cryptocurrencies, and savings accounts.
Even within the stock market, there are different types of stocks: growth stocks, value stocks, dividend stocks, blue chips and other classifications. You can also split stocks by sector, geography or market capitalization.
Diversification across these categories can protect you from a downturn in a particular asset class, sector, region, etc. A good rule of thumb is to have about 25 to 30 positions in your stock portfolio, but if that sounds too complicated, consider a few ETFs. The most popular ones track major indexes such as the S&P500giving you direct exposure to the hundreds of stocks within the index.
Does it make sense to sell Nvidia shares?
Some long-term investors prefer a “set it and forget it” approach to their investments. If you buy great stocks and hold on through thick and thin, you should be able to generate strong profits over the long term. But even these investors should occasionally review their portfolios to see if adjustments are needed to support their investment goals.
And this brings us to the dilemma for Nvidia shareholders. What happens if a stock rises in value and becomes too large a share of your overall portfolio?
Let’s say you originally allocated 5% of your portfolio to Nvidia, but because the stock has risen so quickly, it now makes up more than 25% of your holdings. This is a case where you might want to sell some Nvidia stock and reallocate those funds to get your portfolio back into a more risk-resistant allocation. It may seem counterintuitive to reduce your exposure to a great company, but such a move may be necessary to align your portfolio with your investment goals.
Let me give you two recent examples of billionaire investors who made high-profile sales of excellent stocks. First, Warren Buffett recently reduced his stake in the stock sector Apple by selling an estimated $20 billion worth of stock in the first quarter. But investors should not mistake this for a loss of confidence in the company; this still accounts for almost 43% of confidence Berkshire Hathaway‘s entire portfolio. Meanwhile, Bill Ackman recently sold 10% of his position Chipotle Mexican Grill. Even with that sale, it remains the largest position in the Pershing Square Capital portfolio at 20%.
Finally, several billionaire investors recently sold some of their stakes in Nvidia, including Ken Griffin of Citadel Advisors, Israel Englander of Millennium Management, and John Overdeck and David Siegel of Two Sigma.
Nvidia’s current momentum won’t last forever. When the pullback eventually comes, it doesn’t have to upend your entire portfolio if you take the steps to diversify your investments based on your risk tolerance and investment goals.
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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Berkshire Hathaway, Chipotle Mexican Grill, and Nvidia. The Motley Fool has a disclosure policy.
One day, Nvidia stock will fall. Here’s how to prevent this from hurting your wallet. was originally published by The Motley Fool
