I know you guys are on the record as being big fans of index funds but I was wondering if the stock markets disproportional focus on tech (specifically the mag7 and AI) has changed that?
Honey, we are SO GLAD you asked. This might be a long one though, so let me set things up for those just tuning in.
First off, you're right that we have traditionally recommended index fund as the best and only way the average person should invest. We explain why in these articles:
Investing Deathmatch: Managed Funds vs. Index Funds
Season 4, Episode 1: “Index Funds Include Unethical Companies. Can I Still Invest in Them, or Does That Make Me a Monster?”
Investing Deathmatch: Investing in the Stock Market vs. Just… Not
We also recommend diversifying one's investments to shield against things like over-leveraging yourself in one realm or another. We explain why in the below articles (TRIGGER WARNING: one uses Harry Potter as a metaphor. We wrote it before we knew Rowling was a TERF):
The Dark Magic of Financial Horcruxes: How and Why to Diversify Your Assets
Investing Deathmatch: Stocks vs. Bonds
Now, you're bringing up the very alarming news that tech giants like Amazon, Meta, Google, Tesla, etc. (sometimes called the "Magnificent 7" in the stock market) and AI companies like OpenAI and Anthropic are making up a disproportionate chunk of the S&P 500 stock market index. What this means is that anyone who invests in an index fund for the purpose of diversification is actually less diversified than they'd intended. We're all over-exposed to the tech giants' nonsense. And when the AI bubble bursts (and note that this is indeed a "when" and not an "if"), index funds are going to take a big hit.
To answer your question, we are still big proponents of index funds as the best way for the average person to invest. But in light of this over-exposure to AI and tech, we recommend more diversification with bond indexes than stock indexes (see the stocks v. bonds article above). While this won't 100% shield us from a tech bubble bursting, it will definitely help.
What we are not doing is selling all our index funds right now. The stock market is cyclical, and historically when it goes down it also bounces back eventually (more on that in the links below). Even if the AI companies all go belly-up, the overall index will recover because it tracks the majority of publicly traded companies, not JUST the tech companies. That's a very simplified explanation, but basically: investing is a long game. If you're overly concerned about what's going to happen in the next 5 years (for example, if you're about to retire and live off your investments), then you should not be investing in moderate-to-high risk vehicles right now.
Personally, I invest a little bit outside stock indexes and bond indexes. The individual company stocks I own are things like Costco (NASDAQ: COST), Waste Management (NYSE: WM), and American Water Works (NYSE: AWK). They're not tech stocks, and traditionally they have been stable bets during recessions. But Kitty and I are not trained experts, we're just huge money nerds, so you're right to be doing your own research and staying in the loop about the coming tech bubble bursting. Good luck, and here's more info:
Booms, Busts, Bubbles, and Beanie Babies: How Economic Cycles Work
What's the REAL Rate of Return on the Stock Market?
Wait... Did I Just Lose All My Money Investing in the Stock Market?
Did we just help you out? Say thanks by joining our Patreon!
