Photo by Andrew Keymaster on Unsplash
Earlier this year I was getting a flood of concern over how dominate the tech/AI sector had become in the S&P 500, and by extension a total market ETF like VTI.
In The Simple Path to Wealth May 26th newsletter, I addressed this question:
Q: Given the top 10 holdings in Fidelity’s total market index fund are primarily composed of companies enmeshed in the AI battle, what are your thoughts on hedging against an “AI bubble” with mid-cap or other index funds? Do you think there’s a bubble at all? —Kenny S.
A: Hi Kenny,
Great question!
I have no idea if we are in an AI bubble or if this is the beginning of a great new technology. Or something in between. Nobody does, including all those in the media these days claiming they do.
It is said the market will do whatever it needs to do to embarrass the most people.
In short, I don’t know. I don’t have to. This is the beauty of investing in low-cost broad-based index funds.
We don’t have to guess at which stocks will do well and which will do poorly. Nor do we need to worry about which sectors will dominate and for how long.
Years ago I coined a term—the market is “self-cleansing”—to describe the process.
Index funds like these are “cap-weighted,” which simply means a greater percentage of the fund is in the bigger, more successful companies.
The stocks and sectors that do well rise to the top, and our fund owns more of these winners. When/if they begin to fade, we will own less of them and more of those that take over.
To be clear, this doesn’t mean there will never be bubbles or crashes.
There definitely will be.
It is just that nobody can predict them.
When they come, we tie ourselves to the mast and endure the storm, knowing it will pass and the market will resume its relentless rise.
—JL
Well, it didn’t take long for some those tech names to go off the rails.
In this post…
…Ben Carlson shows just how badly hit some of these names have been. Some are off 30, 40, 50 60+ percent.
He points out similar plunges are happening in other sectors like apparel brands. Along with the “absolute wreckage” of the “pandemic darlings” over the last few years.
Yet the market overall is up ~10% YTD.
Sectors rotate in and out of favor, just like individual stocks. Predicting which, when, how and by how much is impossible.
But we invest in the total stock market, so we don’t care.
We don’t have to.
This is the power of “self-cleansing”
