It is no surprise that consistent, long-term investing can yield healthy returns despite market volatility. The recent performance of the Magnificent 7, including Nvidia and Microsoft, offers investors key lessons on navigating market cycles and avoiding hype. Discover how resilience and a long-term perspective can help you make smarter investment decisions.
When it comes to investing in shares, it’s often said that time in the market is more important than timing the market. The principle of consistently investing small amounts over time and holding onto those investments through market ups and downs can yield healthy returns. Historical data affirms this, showing that the top 500 US companies have averaged a 10% annual return over the past two decades, and Australia’s S&P ASX All Ordinaries Index has recorded an average annual return of 9.2%[i].
These returns have been achieved despite some catastrophic events that sent the markets plummeting, including the dot-com bubble crash, the Global Financial Crisis, and the effects of COVID-19. Holding onto investments during these downturns requires resilience, but one effective strategy is to avoid the hype and tune out the ‘noise’. Checking prices too frequently can lead to heightened stress and anxiety about your portfolio. A recent example includes the mid-2024 CrowdStrike and Microsoft outages, which briefly impacted investor confidence[ii].
Understanding market cycles
Market cycles, characterised by alternating phases of growth and decline, are a constant in investing. Most cycles follow a predictable pattern: an early upswing after the market bottoms out, followed by a bull market where investor confidence is strong, and prices rise rapidly. Eventually, the market hits its peak, and prices stabilise before negative sentiment drives a bear market. Finally, the cycle bottoms out as prices reach their lowest point.
There are also seasonal market cycles that can influence buying and selling decisions, although there are always exceptions to these patterns. In Australia, the months of April, July, and December have historically been strong on the All Ordinaries Index, while performance is typically the lowest in June[iii]. In the US, shares have shown the strongest performance in November and April over the past 30 years, with average monthly gains of 1.9% and 1.6%, respectively.
The Magnificent 7
The performance of Nvidia and the Magnificent 7 presents a real-time lesson in market dynamics and cycles. Over the past 18 months, these seven US technology stocks—Nvidia, Alphabet, Microsoft, Apple, Meta, Amazon, and Tesla—have seen significant growth, aligning with seasonal market patterns to some extent.
In 2023 alone, these stocks returned more than 106%[iv]. In the first half of 2024, their prices rose around 33% on the US S&P 500 index, while the rest of the index increased by only 5%. However, recent trends have shown a shift; the Magnificent 7 has now narrowed down to the Magnificent 3, primarily due to heightened excitement around artificial intelligence (AI).
Nvidia, Alphabet, and Microsoft have surged ahead, doubling the performance of the other four stocks. Nvidia has been a standout performer, with its price nearly tripling in 12 months[v]. However, volatility has been evident. A correction in June knocked Nvidia from its brief status as the world’s largest company, dropping it to third place behind Microsoft and Apple[vi].
Opinions vary on the sustainability of this growth. Some analysts describe the activity as a bubble that is due to burst, while others argue that the Magnificent 7 stocks are undervalued and have further growth potential. Regardless of the viewpoint, it’s crucial to remain cautious about getting caught up in the hype surrounding rapidly rising prices.
Holding steady through the hype
Maintaining a cool head and thoroughly understanding what you are investing in, along with the potential risks, will help keep you focused on your long-term investing goals. Investing can be akin to a rollercoaster, with market cycles inevitably bringing both highs and lows. However, by maintaining a long-term perspective and resisting the urge to react impulsively to short-term market movements, you can better position yourself for success.
Making an informed decision
Investing is not a sprint; it’s a marathon. The cycles of the market, including the inevitable ups and downs, are a natural part of the investing journey. By understanding these cycles and remaining focused on your long-term objectives, you can navigate the market with greater confidence.
The performance of Nvidia and the Magnificent 7 offers valuable lessons for investors. While the excitement surrounding certain stocks can be enticing, it’s essential to maintain a disciplined approach and avoid getting swept up in the hype.
It is important to seek the advice of a financial adviser to help you understand these market dynamics and provide you with personalised advice tailored to your unique circumstances and long-term objectives.
If you would like more information on investing or further clarification on market cycles, contact our office today.
DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.
[i] Vanguard (2023) 2023 Vanguard Index Chart: The real value of time
[ii] MSN (2024) CrowdStrike and Microsoft shares plunge after major outage
[iii] ASX (2024) The ‘best’ and the ‘worst’ months for shares
[iv] Vanguard (2024) The Magnificent 7: A cautionary investment tale
[v] ABC News (2024) Nvidia becomes world’s most valuable company, toppling Microsoft amid pursuit of AI domination
[vi] Yahoo Finance (2024) Nvidia Enters Correction Territory as Slump Erases $430 Billion
