The “Magnificent Seven” have dominated financial headlines in recent months after a year of generating high returns on the US stock market.
When an individual or small group of stocks do well in an otherwise lacklustre year, it’s tempting to want to capitalise on the success. But don’t forget that this isn’t the first time markets have been dazzled by a few star players.
Read on to discover why you may want to think twice before investing a significant proportion of your portfolio in the Magnificent Seven.
The Magnificent Seven is a group of US technology stocks that have vastly overperformed over the past year
The Magnificent Seven is the nickname given to a group of US technology stocks, namely:
- Alphabet (formerly Google)
- Amazon
- Apple
- Meta (formerly Facebook)
- Microsoft
- NVIDIA
- Tesla
These companies performed exceptionally well in 2023. CNBC reports that the group experienced positive returns of 107% over the course of 2023. In comparison, the MSCI USA index grew by 27%.
The CNBC report suggests that the hype surrounding artificial intelligence (AI) through the year as well as broad expectations of rate cuts by the Federal Reserve are likely to have caused such impressive growth.
By the start of 2024, the Magnificent Seven occupied a significant portion of overall market share
As a result of the growth seen during 2023, the companies in the Magnificent Seven began to take up a significant portion of global market shares. In fact, on one global index, the group had the same weighting as the total economies of the UK, Japan, Canada, China, and France combined.
Source: The Guardian
So, if you had invested in this fund, a large proportion of your money would have been in the Magnificent Seven, potentially affecting the level of diversification within your portfolio.
A look back through history shows that past performance doesn’t guarantee future performance
At times like these, it can be tempting to move more of your money into stocks that are overperforming in the hope that you’ll benefit from further rapid growth.
Despite this, historic data about stocks that are outperforming shows us that the trend may not last.
A report in Professional Adviser points out that stocks that enjoyed a similar level of hype and returns 20 years ago have since fallen in value.
For example, General Electric was the most highly valued company in the world in 2004, but its total returns since that year have been just 15%. Morningstar explains that a series of poor management decisions coupled with losses during the 2008 financial crisis caused its value to plummet.
Similarly, companies like AIG, Cisco Systems, Citigroup, IBM, Intel, and Pfizer, which all experienced high returns and market hype, have dwindled in value since then.
Indeed, only one of the 10 biggest companies from 2004 remains in the top 10 today, and that company is Microsoft.
This raises the question of how long each of the Magnificent Seven could continue to outperform. The likelihood of all seven remaining in the top spots over the long term seems low, but it’s impossible to predict when, and by how much, their value could fall.
It’s important to have a diversified portfolio, but it can be challenging to strike the right balance
As you can see, though the Magnificent Seven may be overperforming now, you never know what could be around the corner.
Indeed, the fundamental principles of investing still apply: past performance doesn’t guarantee future returns. While these seven stocks might be generating excellent returns today, this may not be the case in years to come.
As such, diversification remains an important factor for your portfolio as this can help to mitigate the risk posed by any particular stock, industry, or asset type.
What’s so challenging about the current circumstances is that, if you hadn’t invested in the Magnificent Seven in 2023, your investment returns would likely have been disappointing. Fidelity reports that global markets excluding these stocks rose by just 10% last year – a meagre return comparatively speaking.
This is why it’s usually sensible to consult your financial planner for guidance in balancing your portfolio. They can help you to choose the most appropriate investments for you, based on your attitude to risk, your goals, and the time frame within which you’d like to achieve them, plus any external factors that could affect your investments.
By taking the time to carefully curate your portfolio, and regularly reviewing it to ensure it remains balanced, you give your wealth a much greater chance of enabling you to achieve your long-term goals.
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