AI & Your Investments
Technology and artificial intelligence (AI) have become major topics for investors, with the "Magnificent 7" tech companies and AI adoption having grown rapidly in recent years. While you might not directly invest in any of these companies, they do have an effect on your investment portfolio as the growth of AI has made a direct impact on the economy and become an integrated part of our daily lives. For a long term investor, the main goal is to strike a balance between participating in technology-driven growth while managing the risks that come when too much money is invested in just a few companies.
How AI Is Changing Markets and the Economy
AI has moved beyond theoretical discussions and is now actively transforming industries. Companies are investing hundreds of billions of dollars into AI infrastructure, tools, and talent. This shift is influencing productivity, business models, and competitive dynamics across sectors.
What Technology Companies Mean for Your Portfolio
Technology companies now represent approximately 35% of the S&P 500 Index*. This means many investors may be more exposed to this sector than they realize.
The “Magnificent 7” (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla) have significantly outperformed the broader market, driving much of the recent gains. Several of these companies have reported earnings that exceeded expectations, helping to lift the overall stock market. However, this strong performance also raises concerns about whether current valuations are sustainable. I’ve touched on this phenomenon previously in The Other 493 Stocks You should Invest In.
With the rise of passive investing—where your portfolio tends to move in line with the overall market—just a few large companies are increasingly driving market performance. While this approach allows investors to benefit from broad market growth, it also means your returns may be heavily influenced by the fortunes of a small group of firms.
To reduce this concentration risk, it's important to diversify your portfolio beyond these dominant players. Small- and mid-cap U.S. companies, as well as international markets can provide alternative sources of growth. Over time, this broader diversification helps ensure your investments are not overly dependent on any single sector or region, giving your portfolio more paths to long-term success.
Balancing Risk and Growth in Your Portfolio
While tech companies have performed well, this creates what's called "concentration risk." This happens when a small number of companies have too much impact on investment returns. Concentration risk is the opposite of diversification (spreading investments across many different areas).
For long-term investors, this situation shows why it's important to review your portfolio regularly. While it might seem smart to put more money into recent winners, prudent investing means maintaining a balance across different types of companies, sizes, and locations.
Technology and AI offer growth opportunities, but it's important to maintain a balanced investment approach. Regular portfolio reviews help ensure your investments stay aligned with your long-term financial goals.