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.

The catchy movie title seems to have stuck over the last 64 years, and now there’s an alternative ‘Magnificent 7’ that’s garnering even greater attention, on a global scale.

Today’s Magnificent 7 are the mega-cap¹ technology companies Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, which have a combined market value of £12.13 trillion².

Like film critics getting excited about a blockbuster movie with an all-star cast, markets can’t wait to see what this group of stocks has to show for itself.

Collectively, the Magnificent 7 returned more than 63% in 2023, fuelled by investor optimism over their direct or peripheral involvement in the development and use of artificial intelligence (AI) technologies.

Based on their market weightings (their share of the overall market), the seven stocks have been the main drivers behind the big gains recorded by the US market over the past 17 months.

In 2023 they spurred the US Nasdaq Composite³ and S&P 500⁴ indexes to gains of 39% and 19%, respectively. Year-to-date, the Nasdaq and S&P 500 are up 5.8% and 7.9%, respectively⁵.

Behind the scenes

Most companies have now revealed their reports for the first quarter of 2024, where they release their sales and profits, and US tech has certainly been under the spotlight. Alphabet, Amazon, Meta, Microsoft and Nvidia were rewarded with a big jump in their share price but Apple and Tesla saw a significant drop because their results underperformed the market’s expectations.

Some commentators have speculated that the Magnificent 7 could soon see a shake-up and be renamed the Fab 5.

This shows the dangers of chasing hot market trends as they don’t necessarily last, and future potential trends may never come to pass. Strong demand for a real or perceived trend can artificially inflate market prices as we have seen recently with soaring US share valuations⁶. Since 1950, they have only reached this level during the dot-com bubble and the post-Covid reopening.

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.

Sometimes, investment trend seekers often decide to take out their profits early and move on to something else, which can then trigger a 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 performance over a short period, but equally there can be a significant risk of falls.

If you invest in a single company – or a handful of companies in the same industry – you are overly exposed to the fortunes of just one company’s operations or the sector in which it operates.  

Alternatively, one investment in a broad-based index fund, such as a global exchange-traded fund (ETF)⁷, can provide exposure to hundreds and sometimes thousands of companies operating in many different markets, countries and sectors and should include exposure to the Magnificent 7 anyway.

It’s also important to have a broad spread of bonds⁸ as well as shares in your portfolio. Bonds have historically delivered lower returns than shares but with lower risks, so having some in your portfolio can help to smooth out overall returns.

Your exact asset allocation (the mix of shares and bonds in your portfolio) should always be in tune with your investment goals and your tolerance for taking risk. The bottom line is that a balanced mix of shares and bonds, combined with a disciplined, cost-conscious approach to investing, can help improve investors’ chances of achieving their long-term investment goals.

¹ Mega-caps are companies with a market value over $200 billion.

² Figures as at 30 April 2024. Source: Factset.

³ An index of almost all stocks listed on the Nasdaq stock exchange, with a weighting towards technology companies.

⁴ An index of the 500 leading publicly traded companies in the US.

⁵ Figures as at 15 May 2024. Source: Factset.

⁶ The market’s view of how much company shares are worth. For more on US share valuations, see: Should you be cautious about US share prices?

⁷ ETFs offer you a way to invest in a wide range of bonds or shares in one package. They'll typically track a specific market, like the FTSE 100.

⁸ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.

Important information

Vanguard Asset Management Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.

This article is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

The information contained herein is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

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