Thursday’s sell-off in artificial intelligence stocks served as a reminder of why diversification is essential to staying invested through market volatility, according to CNBC’s Jim Cramer.
Tech shares came under pressure after the Financial Times reported that OpenAI’s annualized revenue was about $20 billion below the amount previously signaled. Oracle tumbled 5.5% and Broadcom dropped 4.35%. Meanwhile, beaten-down stocks outside the AI trade, including Home Depot, rallied as Treasury yields eased following a solid 30-year bond auction. Cramer’s Charitable Trust, the portfolio run by CNBC’s Investing Club, owns shares of Broadcom and Home Depot.
“If you had nothing but artificial intelligence stocks, today would’ve been a nightmare,” the “Mad Money” host said.
The danger of a concentrated portfolio, Cramer explained, is that steep losses could prompt investors to panic, sell their holdings and retreat to cash, potentially missing a subsequent recovery. He argued a diversified portfolio can help cushion losses when a particular investing theme gets hit and make it easier to stay invested.
The cost of missing a market rebound can be substantial. According to JPMorgan, an investor who put $10,000 into the S&P 500 and missed its 10 best trading days between 2005 and 2024 would have ended up with less than half the wealth of someone who stayed fully invested.
That’s why Cramer said holding stocks outside the market’s hottest sectors matters, even when those investments, such as Home Depot, have been frustrating to own. Shares of the home improvement retailer have struggled for years as elevated interest rates weigh on housing activity and consumer spending. But its rebound Thursday helped offset weakness in the AI trade, illustrating how different parts of the market can perform well at different times.
“Do you know how much I’ve hated owning Home Depot?” Cramer said. “The answer is about as much as I loved it today. Because it’s keeping me in the game on days like this one.”
For Cramer, that’s ultimately the purpose of diversification: not necessarily to outperform every day, but to prevent a bad day in one sector from driving investors out of the market altogether.
“My goal when we started this show 22 years ago was and is simple,” he said. “I want you to stay in the game. The only real way to make that happen is diversification. You can’t stay in the game without it.”