Opinion | How SpaceX and the A.I. Bubble Could Impact Your 401(k)

If you have a 401(k), there’s a very good chance that at least some of your money is in an index fund, a type of mutual fund that mirrors the composition of major stock markets, including the Nasdaq. This means that at some point, your retirement savings will be invested in SpaceX—regardless of your feelings about it or its founder, Elon Musk.

It could be soon. In May, after the company’s request to be listed, the Nasdaq unveiled a rule change that allows SpaceX into its index shortly after its initial public offering. (The S&P 500 is requiring the company to wait at least a year.)

Given that millions of Americans may soon find SpaceX shares in their portfolios, it’s understandable why some financial experts are criticizing index investing itself. Currently, just a handful of A.I.-related stocks represent almost half the value of the total stock market index. If these A.I. stocks were to collapse, the value of your index fund would likely follow suit.

I have long championed index funds, having written a best-selling book on the subject and advocated for this investment strategy for over 50 years. In this uncertain moment, I want to share how you can protect your wealth. For those who are particularly averse to Musk, I also offer some alternatives to ease your conscience.

Let’s revisit the arguments against index investing. Many investment professionals view SpaceX as the poster child of the A.I. bubble. Investor enthusiasm has driven the company’s valuation to approximately $2.1 trillion, far exceeding traditional valuation standards. The higher the valuation, the larger the share of the stock market it captures, making SpaceX one of the biggest holdings in the market.

Unlike previous initial public offerings, SpaceX shares are already so expensive that there isn’t much upside potential left. When Facebook (now Meta) went public in 2012, it had a valuation of $100 billion, allowing shareholders to benefit as it grew into a $1.5 trillion giant. Amazon, with a 1997 valuation of $440 million, saw similar growth. However, SpaceX, having been privately owned for so long, will likely see much of its initial gains go to its venture and private equity backers rather than new investors.

Additionally, SpaceX employs a dual-class share structure, granting Elon Musk significant control with minimal independent oversight. Public shareholders will have limited influence over corporate decisions, raising concerns about potential conflicts of interest within Musk’s ecosystem. Many investors may feel uneasy about giving him such power while holding an index fund that includes a substantial share of his company.

These concerns are valid. However, abandoning an indexing strategy may be a mistake. Timing the market is notoriously difficult. Yes, the stock market is currently concentrated, and it may become even more so with companies like Anthropic and OpenAI looking to go public soon.

Historically, the market has always been concentrated. For instance, if you had invested broadly in the late 19th century, much of your money would have been tied up in railroad stocks. In the late 1970s, oil stocks dominated, and in the late 1990s, internet stocks were prevalent. Over the past century, the overall market’s generous 10 percent investment returns have been driven by less than 4 percent of all stocks, with the remainder yielding returns no greater than short-term Treasury bills.

Even during market downturns, index funds tend to outperform. From mid-1999, near the peak of the internet bubble, to mid-2000, when the market bottomed out, index funds outperformed actively managed funds that attempt to pick the best stocks. Recent data from S&P indicates that about 80 percent of actively managed equity funds produced returns inferior to the S&P 500 index last year. Furthermore, the few funds that outperform in one year often do not repeat their success the next year. Over five-, 10-, and 20-year periods, over 90 percent of active equity funds underperform the stock market index. Indexing has consistently proven to be the best strategy for building wealth.

However, I recognize that investing is as much an emotional decision as it is a financial one. Some investments, even those that are financially sound, may make individuals morally uncomfortable, especially if they disagree with Musk’s business practices and public policies.

So, what can you do if you believe owning SpaceX is morally indefensible? While there is no perfect substitute for an index fund, there are alternatives worth considering.

One option is to invest in E.S.G. funds, which focus on companies based on their environmental, social, and governance practices. However, investing entirely in E.S.G. funds is neither prudent nor virtuous, as there is no universally accepted definition of what constitutes a good E.S.G. company. Different rating services often provide vastly different scores for the same company. Even if a company like Tesla is deemed fundamentally “good,” some investors may still feel uncomfortable owning it due to its association with Musk. E.S.G. funds performed well when oil prices fell sharply, but they often have high fees and may underperform in other periods.

Alternatively, you could construct a portfolio that is less reliant on tech and A.I. firms than the general market. For example, consider investing in a “value” fund, which typically holds less risky and more conservatively valued stocks. High dividend or dividend-growth funds may also be suitable for retired investors. While you won’t eliminate the overhyped highfliers, you can reduce risk in your portfolio and mitigate the current market’s high concentration in new technologies.

If you choose this route, I recommend following three rules. First, examine the securities held by the funds to ensure you are truly achieving your investment objectives. Second, ensure that your portfolio is broadly diversified; a narrow portfolio (for example, invested in just one industry) carries extra risk. Third, and most importantly, choose funds with a low expense ratio (0.05 percent or lower). The best predictor of a fund’s future performance is its expense ratio. As Vanguard’s Jack Bogle famously stated, “In investing, you get what you don’t pay for.”

Lastly, I must caution that divesting from undesirable practices can be a complex endeavor. A friend of mine became so upset with Musk that she sold her beloved Tesla at a significant loss. However, not everyone, particularly those who remember World War II, would have applauded her decision to purchase a German-made vehicle instead. In our complicated world, finding universally virtuous choices is not straightforward.

If you have a 401(k), there’s a very good chance that at least some of your money is in an index fund, a type of mutual fund that mirrors the composition of major stock markets, including the Nasdaq. This means that at some point, your retirement savings will be invested in SpaceX—regardless of your feelings about it or its founder, Elon Musk.

It could be soon. In May, after the company’s request to be listed, the Nasdaq unveiled a rule change that allows SpaceX into its index shortly after its initial public offering. (The S&P 500 is requiring the company to wait at least a year.)

Given that millions of Americans may soon find SpaceX shares in their portfolios, it’s understandable why some financial experts are criticizing index investing itself. Currently, just a handful of A.I.-related stocks represent almost half the value of the total stock market index. If these A.I. stocks were to collapse, the value of your index fund would likely follow suit.

I have long championed index funds, having written a best-selling book on the subject and advocated for this investment strategy for over 50 years. In this uncertain moment, I want to share how you can protect your wealth. For those who are particularly averse to Musk, I also offer some alternatives to ease your conscience.

Let’s revisit the arguments against index investing. Many investment professionals view SpaceX as the poster child of the A.I. bubble. Investor enthusiasm has driven the company’s valuation to approximately $2.1 trillion, far exceeding traditional valuation standards. The higher the valuation, the larger the share of the stock market it captures, making SpaceX one of the biggest holdings in the market.

Unlike previous initial public offerings, SpaceX shares are already so expensive that there isn’t much upside potential left. When Facebook (now Meta) went public in 2012, it had a valuation of $100 billion, allowing shareholders to benefit as it grew into a $1.5 trillion giant. Amazon, with a 1997 valuation of $440 million, saw similar growth. However, SpaceX, having been privately owned for so long, will likely see much of its initial gains go to its venture and private equity backers rather than new investors.

Additionally, SpaceX employs a dual-class share structure, granting Elon Musk significant control with minimal independent oversight. Public shareholders will have limited influence over corporate decisions, raising concerns about potential conflicts of interest within Musk’s ecosystem. Many investors may feel uneasy about giving him such power while holding an index fund that includes a substantial share of his company.

These concerns are valid. However, abandoning an indexing strategy may be a mistake. Timing the market is notoriously difficult. Yes, the stock market is currently concentrated, and it may become even more so with companies like Anthropic and OpenAI looking to go public soon.

Historically, the market has always been concentrated. For instance, if you had invested broadly in the late 19th century, much of your money would have been tied up in railroad stocks. In the late 1970s, oil stocks dominated, and in the late 1990s, internet stocks were prevalent. Over the past century, the overall market’s generous 10 percent investment returns have been driven by less than 4 percent of all stocks, with the remainder yielding returns no greater than short-term Treasury bills.

Even during market downturns, index funds tend to outperform. From mid-1999, near the peak of the internet bubble, to mid-2000, when the market bottomed out, index funds outperformed actively managed funds that attempt to pick the best stocks. Recent data from S&P indicates that about 80 percent of actively managed equity funds produced returns inferior to the S&P 500 index last year. Furthermore, the few funds that outperform in one year often do not repeat their success the next year. Over five-, 10-, and 20-year periods, over 90 percent of active equity funds underperform the stock market index. Indexing has consistently proven to be the best strategy for building wealth.

However, I recognize that investing is as much an emotional decision as it is a financial one. Some investments, even those that are financially sound, may make individuals morally uncomfortable, especially if they disagree with Musk’s business practices and public policies.

So, what can you do if you believe owning SpaceX is morally indefensible? While there is no perfect substitute for an index fund, there are alternatives worth considering.

One option is to invest in E.S.G. funds, which focus on companies based on their environmental, social, and governance practices. However, investing entirely in E.S.G. funds is neither prudent nor virtuous, as there is no universally accepted definition of what constitutes a good E.S.G. company. Different rating services often provide vastly different scores for the same company. Even if a company like Tesla is deemed fundamentally “good,” some investors may still feel uncomfortable owning it due to its association with Musk. E.S.G. funds performed well when oil prices fell sharply, but they often have high fees and may underperform in other periods.

Alternatively, you could construct a portfolio that is less reliant on tech and A.I. firms than the general market. For example, consider investing in a “value” fund, which typically holds less risky and more conservatively valued stocks. High dividend or dividend-growth funds may also be suitable for retired investors. While you won’t eliminate the overhyped highfliers, you can reduce risk in your portfolio and mitigate the current market’s high concentration in new technologies.

If you choose this route, I recommend following three rules. First, examine the securities held by the funds to ensure you are truly achieving your investment objectives. Second, ensure that your portfolio is broadly diversified; a narrow portfolio (for example, invested in just one industry) carries extra risk. Third, and most importantly, choose funds with a low expense ratio (0.05 percent or lower). The best predictor of a fund’s future performance is its expense ratio. As Vanguard’s Jack Bogle famously stated, “In investing, you get what you don’t pay for.”

Lastly, I must caution that divesting from undesirable practices can be a complex endeavor. A friend of mine became so upset with Musk that she sold her beloved Tesla at a significant loss. However, not everyone, particularly those who remember World War II, would have applauded her decision to purchase a German-made vehicle instead. In our complicated world, finding universally virtuous choices is not straightforward.