From our friends over at Vanguard, this article explores the current state of mega-cap technology stocks, often referred to as the “Magnificent 7,” and the importance of diversification in investing.
By Tony Kaye, Senior Personal Finance Writer
As a group, these companies have been riding high. But looks can be deceptive.
In the 1960 Western movie The Magnificent Seven, a group of American gunmen help defend a small Mexican village from being pillaged by a gang of ruthless bandits.
It was a box-office hit, ultimately leading to three sequel movies, a TV series, a remake in 2016, and to the movie studio Metro-Goldwyn-Mayer last year announcing it was adapting a new TV show based around the original film.
The catchy movie title seems to have stuck over the last 64 years, and right now there’s an alternative “Magnificent 7” hero bunch that’s garnering even greater attention, on a global scale.
It features an all-star, eclectic cast of mega-cap technology stocks — Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – which at 16 April had a combined market value of US$13.5 trillion (A$21 trillion).
Collectively, the “Magnificent 7” returned more than 106% in 2023, fuelled by investor hype over their direct or peripheral involvement in the development and use of artificial intelligence (AI) technologies.
Based on their market weightings, the seven stocks have been the main drivers behind the big gains recorded on United States’ share markets over the last 16 months. In 2023 they spurred the Nasdaq Composite and S&P 500 indexes to gains of 37% and 24%, respectively. Year-to-date, again largely thanks to strong investor demand for the “Magnificent 7”, the Nasdaq and S&P 500 are up 7.4% and 6.5%, respectively (as at 16 April).
Behind the Scenes
As a group, the “Magnificent 7” stocks have on average gained around 18% in market value over the course of this year.
Yet, on an individual level, only five of the seven are currently outperforming the broader U.S. share market – three of them by very substantial margins and two by more modest percentages. But two of the seven are significantly underperforming the market, leading some commentators to speculate that the “Magnificent 7” could soon need to be rebadged.
Keeping with catchy labels, a number are now even referring to the strongest of the “Magnificent 7” tech stock performers as “The Fab Four” – a tag generally linked to music band The Beatles.
Only time will tell if the “Magnificent 7” endures as a high-flying group, but herein lies an important lesson for investors. Chasing hot market trends often carries a heightened element of investment risk.
Investment trends don’t necessary last, and future potential trends may never eventuate. Strong demand for a real or perceived trend can artificially inflate market prices.
Fear of missing out (FOMO) on an investment opportunity is a key behavioural driver for many investors. Yet, trendy investments and products don’t necessarily have long-term staying power.
That’s because investment trend seekers often decide to take out their profits early and move on to something else, which can then trigger a significant downturn in the investments that they sell.
The Importance of Being Diversified
Investing in a theme, or a group of stocks exposed to a particular trend, may deliver good upside performance over a short period, but equally there can be significant downside exposure risks.
How you allocate your investment capital can be one of the most important, and often difficult, decisions.
Your asset allocation strategy should always be in tune with your investment goals and your tolerance for taking risk.
If you invest in a single company, you’re basically only buying into that company’s operations and the particular sector in which it operates.
Investing in a few companies can provide you with some diversification, unless all of those companies are operating in the same market sector.
Alternatively, one investment in a broad-based index fund, such as an exchange traded fund (ETF) will provide exposure to hundreds and sometimes thousands of companies operating in many different markets and sectors.
Important Information and General Advice Warning
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor and the issuer of the Vanguard® Australian ETFs. We have not taken your objectives, financial situation or needs into account when preparing the above article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any relevant Vanguard product, before making any investment decision. Before you make any financial decision regarding Vanguard investment products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the relevant TMD before making any investment decisions. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au or by calling 1300 655 101. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market. Retail investors can only use the Prospectus or PDS for informational purposes. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.
