Never bought Nvidia stock? Its slide could still hit your 401(k).
Even if you never bought a single share of Nvidia, the embattled chipmaker’s steep slide this week could still ding your retirement savings.
Nvidia is a component of the S&P 500 and many other indexes, including the Nasdaq 100 and Dow Jones Industrial Average, all popular with retirement savers through funds offered by millions of employer retirement plans. About 97% of retirement plans now offer index funds, up from 79% in 2006, according to March research from the Investment Company Institute and ISS Market Intelligence.
That means even if you haven’t directly bought Nvidia stock, your 401(k) is likely exposed to the chipmaker through an index fund, such as the SPDR S&P 500 ETF Trust or Vanguard’s S&P 500 ETF (which trade under the tickers SPY and VOO, respectively).
Overall, Nvidia represents about 6% of the S&P 500 index, making it the second-largest component after Apple, according to Yahoo Finance.
Nvidia’s shares started falling on Monday amid revelations that cofounder Jensen Huang had an extramarital relationship with a suspected Chinese spy. Huang resigned from his role as CEO on Thursday, causing a further drop in the stock.
Since Nov. 6, the company’s value has declined by more than $550 billion — a decline of about 13% in one week. While that will certainly hurt investors who directly own Nvidia shares, it may also impact people with indirect investments through funds that hold the chipmaker.
Nvidia’s woes underline the risks inherent in many big tech companies widely held by U.S. investors, Shiva Rajgopal, a Columbia Business School professor who studies corporate governance, told CBS News.
The “Magnificent Seven” tech stocks account for about one-third of the S&P 500. As with Nvidia, several of those companies are closely associated with CEOs whom investors see as central to their success, such as Elon Musk at Tesla, Rajgopal noted. And as Nvidia’s selloff showed this week, trouble for a charismatic CEO can quickly spill over into the company’s stock.
“They are amazing wealth creators for shareholders,” Rajgopal said. “But hopefully, shareholders know what they are doing when they buy the stock of these companies, because the exact same structure also has a lot of fragility built into it.”
A drag on the S&P 500
The AI industry’s influence on Wall Street was evident this week, as turmoil at Nvidia triggered a broader slump in technology stocks. Yet more companies within the S&P 500 rose rather than fell this week, boosting the index by 2.9% for the week through Thursday’s close. Excluding Nvidia, the index would have gained an estimated 3.8%.
“If you check your account today, tomorrow, you’re going to see some sort of fluctuation, especially if you own shares of Nvidia,” Sabrina Escobar, a reporter at Barron’s, told CBS News. “The decline we saw over the past couple of days will certainly have some implications in your daily or weekly stock movements.”
For investors, Huang’s sudden downfall and Nvidia’s wobbly stock highlight the importance of properly diversifying their portfolios, Mercer Advisors chief investment officer Donald Calcagni said in a blog post.
“Events like this — where the outcome hinges on one company’s leadership — are a risk we try to minimize through diversification,” he wrote. “This is the core principle behind portfolio diversification strategies: spread your risk broadly enough that no single company’s troubles can derail your long-term plan.”
Of course, that’s the idea behind holding a broad-based index fund like the S&P 500 — rather than concentrating your money in a handful of individual stocks, you’re spreading your bets across hundreds of types of companies. And the fact that the S&P 500 is on track to post a weekly gain despite Nvidia’s turmoil points to how that strategy can pay off.
Timing is not on your side
Investors may be tempted to sell when the market, a stock or a fund tumbles, but research has repeatedly shown that trying to determine the right time to buy or sell an investment usually results in losses.
Meanwhile, tech experts noted that Nvidia’s chips remain essential to the artificial intelligence sector, a key competitive edge unlikely to change in the near term even with Huang’s abrupt departure. In other words, holding Nvidia shares may be a way to bet on the broader AI industry, rather than on its executive roster.
“When a single company’s stock drops on unexpected news, the best response is usually the simplest one: pause, keep the news in perspective and let your diversified portfolio do what it was designed to do,” Calcagni said.
