In financial markets, the subject of the current prevailing narrative can sometimes come to dominate the behaviour of some investors, at least in the short term.
Take the theme of artificial intelligence (AI), for example, which has been creating substantial excitement in the stock market since OpenAI announced the launch of its generative AI tool, ChatGPT, in March 2023. Since then, it has at times felt as though stocks that are linked to the AI theme were the only things that mattered, at least as far as the media is concerned.
Over-enthusiasm for a particular theme like AI can lead to investor mistakes, however, and we would always caution against chasing the hype. The prevailing narrative can and does change on a regular basis, and what performs well in one year will not necessarily do well in the next. It can also lead to investors becoming blinkered, raising the risk that they become too concentrated on a particular theme and miss out on other opportunities and the important broader benefits that genuine diversification can bring.
Investment success stories can come in all sorts of shapes, sizes and colours. Even in a world currently obsessed with the future (unproven and as yet, unknown) potential of artificial intelligence and technology more broadly, value can appear in many forms and in many different places.
Holding too many eggs in one basket is not, we are often told, a sensible strategy in many parts of life. In an investment sense, the lack of diversification that may stem from being allured by the stock market’s latest obsession, can lead to an increase in concentration risk.
At Cavendish, we believe in diversification. The portfolios we recommend for our clients are formed by owning a little bit of practically everything. This means holding some – but not too much – of whatever is grabbing the market’s attention at any particular point in time.
It means having some exposure to the AI theme that is currently dominating the market narrative. It is a disciplined investment approach that aims to avoid disappointment by simply harvesting the overall market’s return, whether it is generated by seven stocks or seven hundred of them. This diversified and disciplined strategy aims to avoid the temptation of the market’s latest fixation, wherever it may lie.
Guy Beck is a senior financial planner with Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS.
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The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.
