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
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
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
-
Stocks Slip to Start Fed Week: Stock Market TodayWhile a rate cut is widely expected this week, uncertainty is building around the Fed's future plans for monetary policy.
-
December Fed Meeting: Live Updates and CommentaryThe December Fed meeting is one of the last key economic events of 2025, with Wall Street closely watching what Chair Powell & Co. will do about interest rates.
-
This Is Why Investors Shouldn't Romanticize BitcoinInvestors should treat bitcoin as the high-risk asset it is. A look at the data indicates a small portfolio allocation for most investors would be the safest.
-
Stocks Slip to Start Fed Week: Stock Market Today
While a rate cut is widely expected this week, uncertainty is building around the Fed's future plans for monetary policy.
-
December Fed Meeting: Live Updates and Commentary
The December Fed meeting is one of the last key economic events of 2025, with Wall Street closely watching what Chair Powell & Co. will do about interest rates.
-
Why Investors Shouldn't Romanticize Bitcoin, From a Financial Planner
Investors should treat bitcoin as the high-risk asset it is. A look at the data indicates a small portfolio allocation for most investors would be the safest.
-
I'm a Financial Pro Focused on Federal Benefits: These Are the 2 Questions I Answer a LotMany federal employees ask about rolling a TSP into an IRA and parsing options for survivor benefits, both especially critical topics.
-
Private Credit Can Be a Resilient Income Strategy for a Volatile Market: A Guide for Financial AdvisersAdvisers are increasingly turning to private credit such as asset-based and real estate lending for elevated yields and protection backed by tangible assets.
-
5 RMD Mistakes That Could Cost You Big-Time: Even Seasoned Retirees Slip UpThe five biggest RMD mistakes retirees make show that tax-smart retirement planning should start well before you hit the age your first RMD is due.
-
I'm a Wealth Adviser: My 4 Guiding Principles Could Help You Plan for Retirement Whether You Have $10,000 or $10 MillionRegardless of your net worth, you deserve a detailed retirement plan backed by a solid understanding of your finances.
-
A Retirement Triple Play: These 3 Tax Breaks Could Lower Your 2026 BillGood news for older taxpayers: Standard deductions are higher, there's a temporary 'bonus deduction' for older folks, and income thresholds have been raised.
