Nvidia's 17% Plunge Exposed One of the Greatest Risks in the Stock Market

Nvidia's(NVDA -3.67%) stock price plummeted 17% on Jan. 27, 2025, erasing over $590 billion from its market cap in a single day. This historic market-cap destruction marked the largest single-day loss for any company in U.S. stock market history. The sell-off was sparked by concerns that Chinese artificial intelligence lab DeepSeek is presenting increased competition in the global AI battle. This event highlights one of the greatest risks in the stock market: concentration risk.



Concentration risk refers to the increased volatility and risk associated with a top-heavy market, where a few companies dominate the market capitalization of an index. In Nvidia's case, its massive market cap and significant weight in indices like the S&P 500 and Nasdaq-100 make its stock price movements disproportionately impact the performance of these indices. On Jan. 27, 2025, Nvidia's double-digit one-day loss single-handedly brought down the Invesco QQQ Trust(QQQ -0.14%), an ETF that tracks the Nasdaq-100, by 2.9%, and dragged the Vanguard S&P 500 ETF(VOO -0.53%) down 1.4%. This demonstrates how the movements of a few megacap stocks can account for the bulk of the price movement in these funds.



To mitigate concentration risk, investors should consider the following strategies:

1. Know what you own and why you own it: Having a clear investment thesis for each stock or fund in your portfolio helps ensure that your investments align with your risk tolerance and financial goals.
2. Calculate true exposure to individual stocks: Investors should consider their exposure to individual stocks across multiple portfolios and funds. For example, if you own Nvidia stock and an S&P 500 index fund, your true exposure to Nvidia is amplified due to its significant weight in the index.
3. Diversify your portfolio: Investing in a mix of sectors, asset classes, and geographies can help reduce the impact of a single stock or sector on your overall portfolio. This diversification can help protect against market downturns and provide more stable returns over time.
4. Monitor and rebalance your portfolio: Regularly review your portfolio and rebalance it as needed to maintain your desired level of diversification and risk exposure. This can help ensure that your portfolio remains aligned with your investment goals and risk tolerance.
5. Consider using low-cost index funds and ETFs: These funds provide broad-based exposure to multiple stocks and sectors, helping to reduce concentration risk and provide more stable returns over time.
6. Be aware of the concentration of the S&P 500: While the S&P 500 is still a powerful tool for compounding wealth long term, investors should be aware of its concentration in a few dominant stocks, such as Nvidia and Broadcom. Performing a portfolio review can help ensure that you are not overly exposed to a handful of companies or themes.

In conclusion, Nvidia's 17% plunge exposed one of the greatest risks in the stock market: concentration risk. Investors should be aware of this risk and consider implementing portfolio diversification and risk management strategies to mitigate its impact. By doing so, investors can create a more diversified and resilient portfolio, better equipped to navigate market volatility and uncertainty.