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The Magnificent 7: A cautionary investment tale

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 exchange traded fund (ETF) will provide exposure to hundreds and sometimes thousands of companies operating in many different markets and sectors.

This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™ GENERAL ADVICE WARNING Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (VIA) is the product issuer and operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee and product issuer of Vanguard Super (ABN 27 923 449 966). The Trustee has contracted with VIA to provide some services for Vanguard Super. Any general advice is provided by VIA. The Trustee and VIA are both wholly owned subsidiaries of The Vanguard Group, Inc (collectively, “Vanguard”). We have not taken your or your clients’ objectives, financial situation or needs into account when preparing our website content 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 the product before making any investment decision. Before you make any financial decision regarding the product, 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 on our website free of charge, which includes a description of who the financial product is appropriate for. You should refer to the TMD of the product before making any investment decisions. You can access our Investor Directed Portfolio Service (IDPS) Guide, Product Disclosure Statements (PDS), Prospectus and TMD at vanguard.com.au and Vanguard Super SaveSmart and TMD at vanguard.com.au/super or by calling 1300 655 101. 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 website was prepared in good faith and we accept no liability for any errors or omissions. Important Legal Notice – Offer not to persons outside Australia The PDS, IDPS Guide or Prospectus does not constitute an offer or invitation in any jurisdiction other than in Australia. Applications from outside Australia will not be accepted. For the avoidance of doubt, these products are not intended to be sold to US Persons as defined under Regulation S of the US federal securities laws. © 2024 Vanguard Investments Australia Ltd. All rights reserved.

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