Due to the rising popularity of ChatGPT and Sora, the tech industry is currently witnessing a wave of AI trends, leading to a significant surge in Nvidia’s performance and its stock price. Since the beginning of 2024 until March 7th, it has risen by over 80%.
When you witness such a dramatic increase, not to mention you, even I feel tempted, eager to divert some funds from VOO to invest more in Nvidia.
Therefore, regarding the allocation of funds between it and VOO, I will first outline the factors to consider before investing based on my own example. Finally, I will discuss what amount would be reasonable to allocate.
Before investing in Nvidia, 2 things need to consider
I know you’re eager to buy it, but before you take action, there are two things you must ask yourself:
Can you accept the fluctuation of Nvidia?
Nvidia has surged by over 80% in less than three months, which looks very enticing, doesn’t it?
But have you considered the possibility that it could also experience a steep decline of over 50% in a short period?
The following chart, extracted from portfolios lab, mainly compares the cumulative declines of Nvidia and VOO from their peaks over the past decade:
The largest cumulative decline for VOO occurred at the onset of the COVID-19 pandemic in 2020, dropping by nearly one-third. However, Nvidia experienced its greatest decline during the period of aggressive interest rate hikes by the Federal Reserve in 2022, plummeting by two-thirds from its peak.
Furthermore, upon closer examination, it has experienced declines of over 50% from its peak on many more occasions compared to VOO.
In simple terms, its volatility is significantly higher than that of VOO.
Therefore, while you may focus on Nvidia’s high returns, don’t forget the potential for substantial declines it may bring along.
Will you feel more pressure?
Furthermore, when you invest in Nvidia, compared to VOO, it may exert too much pressure on you.
As mentioned earlier, while it can generate an 80% return in a short period, conversely, it can also experience declines of over 50% within a short timeframe. Can you withstand such significant fluctuations?
Moreover, if there’s a single-day decline of over 5%, like on March 8, 2024 (extracted from Yahoo! Finance), will you lose your appetite, lose sleep, and find it difficult to relax even during holidays?
If you keep it long, you will defnitely encounter more case like this, and you will continually ask yourself “can I handle it?” or “can I keep patient on this?”.
Investing means being able to hold onto them steadily without any pressure. Once pressure arises, it’s easy to feel compelled to sell, and feel more regret thereafter.
How should we allocate the funds?
After considering both of these factors, how should we allocate the amounts for VOO and Nvidia?
My personal recommendation is to allocate a maximum of 5% of the funds to Nvidia, with the remainder going to VOO.
Based on my current investment portfolio, Nvidia would occupy no more than 2.5% at most.
As mentioned earlier, I aim to hold onto these stocks for the long term without making any changes due to short-term fluctuations, and I don’t want to put too much pressure on myself, that makes me feel umconfortable all day or all week, and worsens my lfe quality.
Therefore, despite the high returns Nvidia may offer, considering my own risk tolerance and its volatility, I will continue to prioritize VOO. Even if I were to increase my investment, I would only raise it to a maximum of 5% of the total portfolio, without exceeding this limit.