The Bottom Line:
- Invest in the NASDAQ 100 (QQQ/QQQM) and the VanEck Semiconductor ETF (SMH) for a solid foundation in the AI-driven market.
- Dollar-cost average into these high-performing funds to compound your returns over time.
- Add mega-cap tech giants like Microsoft, Google, and Amazon that provide essential cloud services and platforms.
- Consider smaller AI-focused companies with room for growth, but do your research to understand their products and services.
- Avoid getting caught up in the hype and focus on building a diversified portfolio that can weather market fluctuations.
Invest in the NASDAQ 100 and Semiconductor ETFs for a Solid Foundation
The NASDAQ 100: A Concentrated Bet on Tech Giants
The NASDAQ 100 tracks the 100 largest non-financial companies listed on the NASDAQ stock exchange. Since this fund doesn’t hold financial companies like commercial banks, it gets filled with more tech-focused companies benefiting from the huge AI boom. The top five holdings in the NASDAQ are exactly the same as the S&P 500: Apple, Microsoft, Nvidia, Amazon, and Meta Platforms. However, since it only holds 100 companies, each one gets more weight, which means the index can make bigger moves. For example, while the S&P 500 grew by a whopping 26% in 2023, the NASDAQ 100 crushed it, growing by 54% that same year. That’s more than twice the returns during one of the best years in stock market history. In fact, the NASDAQ has outperformed the S&P in 12 of the last 15 years, making it a great way to reliably beat the market without getting lucky.
The Vanek Semiconductor ETF: Riding the AI Chip Wave
The Vanek Semiconductor ETF (SMH) tracks the largest chip companies listed on major US exchanges. This ETF is very concentrated, with only 25 companies in its portfolio. Its top five companies are Nvidia, Taiwan Semiconductor, Broadcom, AMD, and ASML, which together make up 51% of the fund, with Nvidia having around a 20% weighting all on its own. Remember, fewer stocks means more volatility, which is a good thing for small portfolios that are actively contributing to the fund. While the fees for SMH are 0.35% per year, it has returned 64% year-to-date, 73% over the last year, and a whopping 375% over the last five years. The global AI chip market is expected to more than 11x in size over the next nine years, which is a compound annual growth rate of over 31% through 2033. This makes SMH a great fund to help grow smaller portfolios without getting lucky.
Dollar-Cost Average Into High-Performing Funds for Compounding Returns
Dollar-Cost Averaging: The Key to Compounding Returns
Dollar-cost averaging (DCA) is a powerful strategy for investors with smaller portfolios. Instead of trying to pick individual stocks, focus on building momentum by letting your money compound over time. The best way to do this is by investing the same amount of money every week, month, or quarter into high-performing funds like the NASDAQ 100 or the Vanek Semiconductor ETF (SMH).
The great thing about DCA is that you end up buying more shares for the same amount of money when prices are low and fewer shares when prices are high. This means the math is always in your favor. Even if you had godlike timing and could buy at the exact bottom of every dip, dollar-cost averaging would still win since you get more of your money into the market earlier, and the market tends to get more expensive over time.
Investing in Mega-Cap Tech Giants with Powerful Platforms
As your small portfolio grows, it makes sense to start adding individual stocks. However, these shouldn’t be random stocks you heard about from a friend or someone on YouTube. Some of the best stocks are the ones that everyone already knows about, like the mega-cap companies at the very top of the NASDAQ, such as Apple, Microsoft, Amazon, Broadcom, Meta Platforms, Tesla, Nvidia, and Google. Together, these companies account for over 40% of the NASDAQ by weight.
When picking between these well-known tech giants, focus on companies with platforms that other businesses pay to build on top of. For example, Microsoft, Google, and Amazon own a combined two-thirds of the global market for cloud services. Millions of businesses pay them each year for services like data storage and security, hosting mobile and web applications, using their computing clusters, and accessing a wide variety of AI and machine learning tools. These services run on top of massive global networks of data centers that are incredibly expensive to research, develop, deploy, maintain, and upgrade over time. It would cost a business way more to build even a tiny fraction of these services for themselves, so these cloud providers won’t be getting disrupted anytime soon, even by generative AI.
Leveraging Software and Hardware Ecosystems
In addition to their cloud platforms, many of these mega-cap tech giants have massive software and hardware ecosystems that millions of businesses rely on and billions of consumers use every month. These ecosystems create powerful network effects, making it difficult for competitors to disrupt their dominance.
For example, Apple’s iOS and macOS operating systems, along with its App Store and iCloud services, create a sticky ecosystem that keeps users locked into its hardware products like iPhones, iPads, and Macs. Similarly, Microsoft’s Windows operating system and Office productivity suite have been the backbone of business computing for decades, while its Azure cloud platform and GitHub code repository are essential tools for developers.
By investing in these mega-cap tech giants with powerful platforms and ecosystems, your small portfolio can benefit from their continued growth and dominance in the AI era.
Leverage Mega-Cap Tech Giants Providing Essential Cloud Services
The Cloud Computing Titans: Microsoft, Google, and Amazon
Microsoft, Google, and Amazon are the undisputed leaders in the global cloud computing market, collectively owning a staggering two-thirds of the market share. These tech giants provide essential services that millions of businesses rely on, such as data storage and security, hosting mobile and web applications, access to computing clusters, and a wide array of AI and machine learning tools. The cloud services offered by these companies run on top of vast, global networks of data centers that are incredibly costly to research, develop, deploy, maintain, and upgrade over time. It would be prohibitively expensive for businesses to build even a small fraction of these services themselves, making these cloud providers virtually immune to disruption, even in the face of generative AI advancements.
Ecosystems and Network Effects: The Moats of Mega-Cap Tech
Beyond their dominance in cloud computing, many of these mega-cap tech companies have built extensive software and hardware ecosystems that create powerful network effects, further entrenching their market positions. Apple, for example, has created a sticky ecosystem with its iOS and macOS operating systems, App Store, and iCloud services, which keep users locked into its hardware products like iPhones, iPads, and Macs. Similarly, Microsoft’s Windows operating system and Office productivity suite have been the backbone of business computing for decades, while its Azure cloud platform and GitHub code repository are indispensable tools for developers. These ecosystems and network effects make it extremely difficult for competitors to disrupt the dominance of these tech giants.
Investing in the AI Era: Riding the Wave with Mega-Cap Tech
As an investor looking to grow a small portfolio in the AI era, allocating a portion of your funds to these mega-cap tech companies can be a smart move. By investing in companies like Microsoft, Google, Amazon, Apple, and others with powerful platforms and ecosystems, you can benefit from their continued growth and dominance in the rapidly evolving AI landscape. While these companies may not offer the same explosive growth potential as smaller, more speculative AI plays, they provide a solid foundation for your portfolio, thanks to their entrenched market positions, diverse revenue streams, and ability to leverage AI advancements across their vast product and service offerings.
Explore Smaller AI-Focused Companies with Growth Potential
Promising AI-Focused Small-Cap Companies
While mega-cap tech giants offer stability and broad exposure to the AI boom, smaller AI-focused companies can provide the potential for outsized returns. These companies often have more room for growth and may be more agile in adapting to the rapidly evolving AI landscape. Some promising small-cap AI companies to consider include:
1. C3.ai (AI): This company provides a suite of AI software tools for businesses, focusing on applications in industries such as energy, manufacturing, and defense.
2. Alteryx (AYX): Alteryx offers a platform for data analytics and machine learning, enabling businesses to automate and streamline their data processes.
3. Veritone (VERI): This company develops AI-powered solutions for media, legal, and government clients, with a focus on audio and video analytics.
Balancing Risk and Reward in Your AI Portfolio
When exploring smaller AI-focused companies, it’s essential to balance the potential for high returns with the inherent risks of investing in less established businesses. These companies may be more vulnerable to market volatility, competition, and the challenges of scaling their operations. To mitigate these risks, consider the following strategies:
1. Diversify your holdings across multiple small-cap AI companies to spread out potential losses.
2. Allocate a smaller portion of your portfolio to these higher-risk investments, while maintaining a core of more stable mega-cap tech holdings.
3. Conduct thorough research on the companies you’re considering, evaluating factors such as their management team, competitive landscape, and financial health.
Staying Informed and Adapting Your Strategy
The AI industry is evolving at a breakneck pace, with new advancements and players emerging regularly. To successfully invest in this dynamic landscape, it’s crucial to stay informed about the latest developments and trends. This may involve:
1. Following industry publications and thought leaders to stay abreast of new technologies and market shifts.
2. Regularly reassessing your portfolio holdings and adjusting your strategy as needed to capitalize on new opportunities or mitigate emerging risks.
3. Continuously learning about the fundamentals of AI and its applications to better understand the companies you’re investing in and their potential for growth.
By combining a core of stable mega-cap tech holdings with a strategically chosen selection of promising small-cap AI companies, investors can position their portfolios to benefit from the AI revolution while managing risk. As with any investment strategy, patience, discipline, and a long-term perspective are key to weathering short-term volatility and achieving lasting success.
Build a Diversified Portfolio to Weather Market Fluctuations
Diversifying Your AI Portfolio with Small-Cap Companies
While mega-cap tech giants like Microsoft, Google, and Amazon offer stability and broad exposure to the AI boom, smaller AI-focused companies can provide the potential for outsized returns. These companies often have more room for growth and may be more agile in adapting to the rapidly evolving AI landscape. Some promising small-cap AI companies to consider include C3.ai (AI), which provides a suite of AI software tools for businesses; Alteryx (AYX), which offers a platform for data analytics and machine learning; and Veritone (VERI), which develops AI-powered solutions for media, legal, and government clients.
When exploring smaller AI-focused companies, it’s essential to balance the potential for high returns with the inherent risks of investing in less established businesses. To mitigate these risks, consider diversifying your holdings across multiple small-cap AI companies, allocating a smaller portion of your portfolio to these higher-risk investments, and conducting thorough research on the companies you’re considering.
Staying Informed in the Rapidly Evolving AI Landscape
The AI industry is evolving at a breakneck pace, with new advancements and players emerging regularly. To successfully invest in this dynamic landscape, it’s crucial to stay informed about the latest developments and trends. This may involve following industry publications and thought leaders, regularly reassessing your portfolio holdings, and continuously learning about the fundamentals of AI and its applications.
By combining a core of stable mega-cap tech holdings with a strategically chosen selection of promising small-cap AI companies, investors can position their portfolios to benefit from the AI revolution while managing risk. As with any investment strategy, patience, discipline, and a long-term perspective are key to weathering short-term volatility and achieving lasting success.
Balancing Risk and Reward in Your AI Investments
When building a diversified AI portfolio, it’s important to strike a balance between the stability of mega-cap tech giants and the growth potential of smaller AI-focused companies. While companies like Microsoft, Google, and Amazon offer exposure to the AI boom through their cloud computing services and vast ecosystems, they may not provide the same explosive growth potential as smaller, more specialized AI plays.
On the other hand, investing in smaller AI companies comes with its own set of risks. These companies may be more vulnerable to market volatility, competition, and the challenges of scaling their operations. To manage these risks, consider allocating a smaller portion of your portfolio to these higher-risk investments and diversifying your holdings across multiple small-cap AI companies.
Ultimately, the key to success in AI investing lies in staying informed, adapting your strategy as the landscape evolves, and maintaining a long-term perspective. By combining a core of stable mega-cap tech holdings with a carefully selected mix of promising small-cap AI companies, investors can position their portfolios to weather short-term volatility and benefit from the transformative potential of artificial intelligence.
