Dear Reader,
I know that we talked about Meta (Facebook) on Friday, but I think the stock's $251 billion rout can teach us an important lesson about investing.
One thing is clear, just because the stock market usually goes up doesn't mean that all stocks always go up. One stock that didn't go up last week was Facebook parent Meta.
After reporting disappointing quarterly results on Wednesday, the company's shares plunged 26% in a single trading day. After losing an eye-popping $251 billion market cap, the social networking company quickly went from being the fifth-largest company in the S&P 500 to the seventh.
This is the kind of move that could've rattled the confidence of investors and traders with positions in other stocks. And it did. That same day, the S&P 500 fell 2.4%.
But losing 2.4% isn't remotely close to losing 26%.
That's diversification at work.
By investing in a variety of assets that aren't perfectly correlated, you limit the ability of a single stock to ruin your finances. Zooming out a bit, the S&P 500 gained 1.5% for the week while FB shares lost 21.4%.
Diversification is looking pretty great right now.
Of course, there is an opportunity cost with diversifying.
Now, I'm not going to tell you not to try your hand at picking stocks. How you invest your money is ultimately up to you.
But, before you decide to abandon index funds as you try to get in front of the next Alphabet or Amazon, keep in mind, there is an entire industry of professionals trying to beat the market this way.
Historical data shows that when you're invested broadly in the stock market, you'll have exposure to the market's winners and losers. So, even if there is a similar crash like Meta's in the near future, you'll be able to shield yourself from the Bearish sentiment that many news outlets are expressing.
As for me, I'm still bullish. Because as we've seen in the past, the market usually is moving upwards over time.
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