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It’s no secret that mega-cap tech stocks have been outperforming the rest of the stock market by a significant margin over recent decades.
Apple, Nvidia, and the rest of mega-cap tech rarely escape the headlines.
Their towering increases in value and the money-making opportunities provided to investors have been breathtaking.
Consider the last twelve months’ results (at the time of publication) of the Roundhill Magnificent Seven ETF which tracks just seven of the largest tech stocks, compared to the S&P 500:
- Roundhill: 65.73%
- S&P 500: 23.74%
Despite the occasional tech sell-off, owning just seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) would have your portfolio trouncing the rest of the market.
But did you know that your gateway to wealth creation through mega-cap tech stocks is as simple as being better than average?
That may not sound inspirational or exciting until you realise that the vast majority of investors fail to keep up with the average.
According to recent research, up to 75% of retail investors lose money.
In today’s post, you’ll discover why tech stocks outperform the market and how to avoid being in the dreaded 75% club.
Why tech stocks outperform the market
Why do tech stocks squeeze out the rest of the market?
Innovation → global mass adoption →supersized earnings growth.
The iPhone is one of the best-selling consumer products of all time; 50 million units were sold in 2011, and by 2015, Apple sold over 200 million iPhone units yearly.
You are likely a direct or indirect consumer of at least two of the Mag 7 stocks (Apple, Microsoft, Google (Alphabet), Amazon.com, Nvidia, Meta, and Tesla).
Nvidia deserves a special mention because unless you own a tech company, shelling out $30 – $40,000 for one of Nvidia’s AI chips is off-limits.
The rest of the MAG 7 businesses can’t get their hands on enough of Nvidia’s chips as they race to develop their in-house AI expertise.
There’s a certain amount of cannibalising at the top of the mega-cap tech ecosystem.
Nonetheless, mega caps have the cash, talent, and infrastructure to continue innovating and offering on-trend products and services to keep them in high demand.
It only makes sense to ensure your portfolio has significant exposure to mega-cap tech stocks.
How to create wealth with mega-cap tech stocks (and reduce risk)
Buying and holding mega-cap tech stocks over long periods is the number one way to create wealth from financial markets.
Concentration rather than diversification is your hidden superpower.
When you buy and hold instead of trading in and out of stocks, you reduce costs by avoiding commissions and fees, and you’ll sleep better at night knowing that you won’t get ‘stopped out’.
Add in the fact that you’re concentrated in tech – you have a winning formula.
A powerful tactic to reduce your overall risk amid such concentration is to avoid using leveraged products such as CFD’s, spread bets, options or margin accounts.
These can expose you to the risk of losing more money than you have in your brokerage account.
The concept of losing more money that sits in your trading is a shocking fact seldom understood by inexperienced investors.
That is until a life-changing call from their broker demands money owed.
Alternatively purchasing stocks and equity index funds and holding them long-term eliminates these risks of exponential losses.
This approach is why the greatest stock market investor of all time has always advised individual investors to buy and hold (and keep buying) a low-cost S&P 500 index tracker for long periods.
Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years
Warren Buffett
Increased liquidity in the global financial system
Liquidity is a key measure of how well financial markets are working. It refers to how easily assets can be bought or sold—and when it dries up, it can be disruptive.
Fabio Cortes, Glenn Gottselig, Shoko Ikarashi, Aki Yokoyama, International Monetary Fund
In plain English when the supply of money across the globe is increased through lower interest rates, government stimuli, or quantitative easing, asset prices (stocks/property/Bitcoin) go up.
They go up because people have easier and more access to cash at lower borrowing rates.
Investors will use this ‘extra cash’ to invest in public and private markets which tends to push up the prices of assets when everyone is buying them.
Increased liquidity in the global financial system is the secret behind why tech stocks have had a superb run over recent years.
Earnings, return on invested capital, talented CEOs, and all the usual suspects of fundamental analysis are still relevant today, it’s just that their influence on tech stock prices is diminished due to the magnitude and unprecedented financial interventions central banks have deployed in the recent past.
Additionally, if you employ skilful portfolio management in your investment operations, you have a better-than-average chance of outperforming the market.
Get better at mega-cap tech stock investing
Whatever your investment time horizons are and what your portfolio looks like today, ensuring you have mega-cap tech stock exposure in your portfolio optimizes for outperformance.
With an active buy-and-hold strategy, you’ll drive down costs, reduce time commitments managing your portfolio, and spend less time worrying about sensationalist headlines designed to poison the positive mindset and psychology required to maintain a market-beating investment approach.
Need help diving deeper into outperforming the market with mega-cap tech investing?
In the free newsletter, you’ll learn how to harness the power of the global tech ecosystem for even greater returns without taking on additional risk.
