As it turns out, DeepSeek, the new Chinese artificial intelligence (AI) app, did not deep-six the stock market – at least not for long. But it may have reshaped the perception of what the rollout of AI will look like in coming years, and it might have you thinking you need to reshape your portfolio, too.
The late-January rout caused by DeepSeek's arrival in the U.S. was ferocious, if short-lived. News of the cheaper, open-source AI model sent chipmaker Nvidia (NVDA) spiraling to a 17% loss that shaved nearly $600 billion in market value – a one-day record.
Utilities powering the AI boom, including Vistra (VST) and Constellation Energy (CEG), also tanked. AI-related stocks remained volatile, even as some experts noted that, although AI beneficiaries (and their stock market leadership) may evolve over time, the technology will remain a dominant force in the economy and financial markets.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"We think cheaper AI means more AI, more quickly," said economists at the bank BNP Paribas, in a note to clients. "This should mean a greater and more rapid productivity boom as the AI rollout snowballs."
As those productivity gains filter through corporate America, expect the fortunes of S&P 500 companies beyond the tech behemoths known as the Magnificent Seven to prosper, says Ed Yardeni of Yardeni Research.
Capitalize on broadening market gains with an equal-weight fund such as the Invesco S&P 500 Equal Weight (RSP).
The free-lunch portfolio strategy
You are not alone if, in the wake of January's upheaval, you are contemplating whether to trim your tech-stock holdings and shift into more defensive sectors.
One way to do that is with a strategy that CFRA Chief Investment Strategist Sam Stovall calls the "free-lunch portfolio."
The strategy calls for a portfolio (or a portion thereof) to be split 50-50 between tech stocks and shares in consumer staples companies. The latter are models of stability, says Stovall, because consumers buy staples such as groceries no matter what.
"When the going gets tough, the tough go eating, smoking and drinking," he quips.
The free-lunch part comes in when you combine the two sectors. In theory, you'll get most of the return delivered by a pure tech-stock portfolio while taking less risk to get it.
Behind Stovall's reasoning: From the start of 1990 through late December 2024, stocks in the information technology sector of the S&P 500 delivered an annualized return of 14.2%, compared with 10.7% for the S&P 500.
The standard deviation (a measure of volatility, or risk) for the tech sector was a whopping 30.8%, compared with 17.6% for the S&P 500 – showing the tech sector to be 75% more volatile than the market as a whole.
Combining the S&P 500 tech and consumer staples sectors delivered a 13.3% annualized return over the period, with a standard deviation of 18.6%. A hypothetical free-lunch portfolio (rebalanced annually) therefore captured 94% of tech's return with only 60% of the volatility. Bon appétit!
Investors can whip up a free-lunch portfolio with exchange-traded funds such as the Consumer Staples Select Sector SPDR Fund (XLP) and the Technology Select Sector SPDR Fund (XLK).
Individual stocks work, too, but come with additional risk. Of course, there's no guarantee that such odd-couple portfolios will perform as they did in the past. "Yet," says Stovall, "this free-lunch approach may be a good way of still riding the tech wave while sleeping better at night."
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
-
A Lesson From the School of Rock About the MarketsIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I retired at 65 with $7.8 million and feel like I over-saved. My 40-something son is on the same path. Should I tell him to reconsider?We ask financial experts for advice.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and Around
It's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
Dow Adds 472 Points After September CPI: Stock Market TodayIBM and Advanced Micro Devices created tailwinds for the main indexes after scoring a major quantum-computing win.
-
October Fed Meeting: Live Updates and CommentaryThe October Fed meeting is a key economic event, with Wall Street waiting to see what Fed Chair Powell & Co. will do about interest rates.
-
The Delayed September CPI Report is Out. Here's What it Signals for the Fed.The September CPI report showed that inflation remains tame – and all but confirms another rate cut from the Fed.
