“Why isn’t Nvidia in my portfolio?” How advisors answer clients’ questions about hot stocks.

He says he didn’t buy the stock in large quantities because it gained 60% between April and mid-June, and he certainly wouldn’t buy it today at its lofty valuation. “If we had bought it five years ago, the story might have been different,” he says. “But we didn’t.”

Fruzzetti isn’t alone in facing such questions these days. Clients have been bombarding their advisors with questions about the “Magnificent Seven” group of large-cap technology stocks (Alphabet)
,

Amazon.com
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Apple
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Meta-platforms
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Microsoft
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Nvidia
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and Tesla), although some advisors have largely or completely steered their clients away from some of the hottest names, including Nvidia, over the past year.

“It’s not that people have become aggressive, they’re just incredibly curious,” says Ali Flynn Phillips, president of Obermeyer Wood Investment Counsel, a $2.1 billion investment firm based in Aspen, Colorado.

Flynn Phillips sold the Nvidia position it had held for several years in 2023, judging its valuation to be high and delivering a healthy profit for clients, but missing out on an 86% share price upside over the first 5 1/2 months of 2024. “Clients largely understood our rationale, and for those who wanted more exposure to AI, we selectively bought it back into certain accounts,” Phillips said.

Advisors have had many such conversations over the years, with clients asking them about dot-com stocks in the 1990s and FAANG stocks starting in the mid-2010s, for example.

The last time clients were in Fruzzetti’s ear to this extent about an investment was in the glory days of 2021.

ARK Innovation ETF.

Fruzzetti thumbed his nose at the red-hot fund, which has recently fallen more than 70% from its February 2021 peak.

Fruzzetti told clients he doesn’t like the “retail mania” that helped explain Nvidia’s meteoric rise and that he prefers to hold Microsoft for a long time to gain exposure to the AI ​​revolution. Microsoft is up 93% since the start of 2023.

Ryan Detrick, chief market strategist at the $36 billion Carson Group, says clients often ask the firm’s advisors why they don’t own more tech stocks, or even exclusively. Questions like these help explain why advisors spend so much time explaining market history to clients, such as how sectors that lead one year often lag the next. “You tend to get caught up in the shiny objects,” Detrick says.

To allay his customers’ concerns, Mr. Fruzzetti points to Microsoft’s position, built over the past 15 years. The company is a global leader in cloud computing servers, through which about 37% of all the world’s data flows, Mr. Fruzzetti says. It is a major investor in OpenAI, the artificial intelligence research and development company behind big-language AI models like ChatGPT. “I would say they will be one of the most important players in AI,” Mr. Fruzzetti says.

Flynn Phillips tells her clients that investing requires humility. “Sometimes you’re going to sell too early and sometimes you’re going to miss out on businesses,” she says. “But as long as you have other high-quality businesses that generate good returns over time, that’s the ultimate goal.”

Flynn Phillips, who still holds positions in Microsoft, Alphabet and Apple, thinks buzzwords like “The Magnificent Seven” are positive because they encourage her clients to focus more on certain parts of their portfolio. “The downside,” she says, “is that they may focus on one part of the portfolio and not the whole.”

Flynn Phillips and his colleagues have told clients that it’s not necessarily necessary to own the company that’s part of the acronym or buzzword. The key is to own the ones that stand to benefit from the trend that fuels the headline names, an approach that can carry less risk. His firm may no longer own Nvidia, but it does own companies like Taiwan Semiconductor
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ASML
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and Broadcom
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“These are various derivatives of AI, which we are more comfortable with because we think they have better valuations,” says Flynn Phillips.

It can also be wise to invest in non-tech companies that are using AI and other cutting-edge technologies to improve their operations, she adds. These might include unattractive names like Walmart and Deere & Co.
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Investors aren’t as keen on these kinds of names as they are on Nvidia, Meta or Amazon, but they shouldn’t chase past performance, Phillips says. “People like to follow the crowd, and the crowd is great for picking a restaurant,” she says. “But it’s not always great for picking stocks.”

Advisors like to remind clients suffering from fear of missing out that even the most impressive market leadership is transitory. Tesla, which Flynn Phillips never owned, is down about 50% from its 2021 peak. General Electric’s stock is still more than 40% off its 2000 peak. “GE was the most valuable company in 2005,” Phillips says. “Nobody talks about GE anymore.”

No advisor can forbid a client from owning a stock they don’t like. Including a token amount in their portfolio is one way to appease those who really need to own the stock that always seems to pop up on the golf course. Fruzzetti has no problem with clients buying such stocks outside of the account he manages. “I’ve had clients say to me, ‘You know, I’ll buy it myself,’” he says. “I told them, ‘Go have fun, invest a few dollars in the stock if you want; it’s your decision.’”

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