This strategy ensures you capture the next big trend before it dominates the market.
Artificial intelligence (AI) stocks have been the driving force behind the current bull market. Top stocks like Nvidia (NVDA 12.81%) have zoomed higher along with the rest of the AI-related “Magnificent Seven,” and various smaller tech stocks. Just a handful of AI-related stocks accounted for 63% of the S&P 500‘s returns during the first half of the year.
If you missed out on some of the biggest AI winners over the past year, you’ve probably seen your portfolio returns lag the overall market. And therein lies the greatest risk of stock picking: If you’re ahead of the trend, you can see dramatic outperformance, but if you miss it, you may never catch up with the benchmark index.
There are no guarantees about what the next big trend in stocks will be or what industries will drive the economy forward. However, there is a way to guarantee you won’t miss out on the stocks pushing the market to its next set of all-time highs.
Image source: Getty Images.
A tale of two stock markets
The S&P 500 produced a total return of 15.3% through the first half of the year. If you take away just one stock, Nvidia, the total return drops to 10.8%. Similarly, the index produced a total return of 26.3% in 2023, but without Microsoft (MSFT -1.08%) the return falls to just 23.1%.
Both Nvidia and Microsoft have become emblematic of the dominance of AI-related companies in the stock market over the past two years. And data show that missing out on just a single stock could produce results that significantly lag the market.
Granted, some stocks have even outperformed both Nvidia and Microsoft over the past two years. So, if you missed out on the tech giants, but put a lot of your portfolio into those smaller companies, you’re probably doing fine. But many of those outperformers are closely tied to the tech trend as well. If you missed out on the big winners in AI, you missed out on most of the stock market gains.
Another way of looking at it is by comparing the S&P 500 Ex-Information Technology index to the S&P 500 Information Technology index. Since the start of 2023, the tech-focused index has outperformed the rest of the S&P 500 by nearly 4 times. While information technology stocks generally outperform as a group, that’s a much wider gap than the historical norm.
Data by YCharts
How to make sure you never miss another megatrend
There’s one simple way you can ensure you don’t miss out on the next Nvidia. You can buy the entire basket of stocks. An index fund like the Vanguard S&P 500 ETF (VOO 1.58%) will ensure you capture some of the upside in the next big trend in stocks.
Professor Jeremy Siegel put it bluntly in a recent interview with Barron’s. “It’s difficult to beat the indexes, given the momentum for the artificial-intelligence-related tech stocks,” he said. But the same could be said of any trend. If you miss a few of the best stocks, you’re going to have a hard time beating the index. And if you can’t beat ’em, as the saying goes, join ’em.
The Vanguard S&P 500 ETF is one of the most efficient ways to ensure your portfolio tracks the returns of the S&P 500. Its low expense ratio and strong record of tracking the index closely means you’ll get your fair share of the market returns.
You won’t have to be ahead of the trend because the trend will present itself as the next group of dominant stocks grows to become a larger portion of the S&P 500. As a result, they will grow to become a larger portion of the index fund, and your portfolio by extension. It’s not as sexy as picking the next big winner, but it will prevent your portfolio returns from lagging the market.
Adam Levy has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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