When it comes to investing in the stock market, there are a lot of companies to invest in. Thousands, actually — the New York Stock exchange alone has a combined total of 2,385 listed domestic and international companies (as of 2023).
Which companies should you invest in? Should you avoid big companies? Or invest your entire portfolio in well-known names? While we can’t tell you how to invest, we do want you to understand more about big names in investing. We call them the “Magnificent Seven.”
The “Magnificent Seven”
The Magnificent Seven isn’t just movie cowboys — in this case, we’re talking about companies on the stock market.
This moniker refers to the seven companies that contribute the most to the U.S. stock market:
- Apple
- Microsoft
- Alphabet
- Amazon
- Nvidia
- Tesla
- Meta
Together, these companies currently contribute 66% of the returns in the U.S. market. In other words, if you removed these seven companies from the stock market, the total value of returns would be far less — just one-third of what they are now (as of September 2023).
Because of the power these companies hold, it might seem like the smartest move is to invest as much as possible in the Magnificent Seven. But remember, stocks don’t just rise in value — they also fall. And super valuable stocks like these have a long way to potentially fall.
When stocks fall in value, it can happen quickly — especially in a volatile market. Let’s say you invest the majority of your portfolio in one of these companies. If that company makes a decision that gets a lot of negative press, the value of its shares can drop significantly overnight. That means that the overall value of your portfolio could be drastically different from one day to the next.
As tempting as it is to think that stocks like Apple or Amazon are a “sure thing,” that’s simply not reality. Anything can happen — and those gains can disappear quickly in certain circumstances.
Diversification Matters (Now More Than Ever)
Should you invest in these high-value companies, knowing that the gains and losses can swing dramatically? Maybe. But whether you decide to invest in the Magnificent Seven or not, the best approach to investing is diversification.
Diversification means spreading your money out between many different investments. Yes, it might be a good idea to put some of your money into one (or more) of these top seven companies. Doing so gives you the chance to get high returns when things go well.
But it’s just as important to invest in other companies and alternative assets like bonds.
These investments might not offer the same high level of potential gains. However, they may also offer less risk, which makes them valuable in a different way.
A diversified portfolio gives you the best chance of weathering whatever happens in the market. When conditions favor the big, valuable companies, you can benefit from having those stocks in your portfolio. And when conditions reverse and cause those big companies to lose value, you can feel secure knowing that you have money invested in other areas that aren’t experiencing the same challenges.
You might have heard about the value of diversification before, but it’s always good to have a reminder. And it can be especially helpful during market conditions like this — where seven companies are providing two-thirds of collective gains.
Yes, Apple, Microsoft, and Nvidia stocks might be worth a significant amount of money right now. But that doesn’t mean they will be forever. Past performance doesn’t guarantee future results — and that’s crucial to remember, especially when you’re deciding how you want to invest your money.
Diversifying your portfolio gives you the best chance of balancing possible gains with potential losses. If your money is invested in a diverse range of stocks, bonds, and other assets, you don’t have to worry about losing everything if the stock market falls or bond returns become negligible. You can feel confident knowing that you’re prepared for whatever happens.
Want Help Diversifying Your Portfolio?
Are you wondering how to diversify your portfolio or trying to decide which assets you should put your money into? Guiding Wealth can help!
Our team of financial planners has the expertise and experience to guide you through the investment process. We’ll listen to your goals and help you choose an investment strategy that aligns with those objectives.
You won’t get cookie-cutter advice or lectures full of complicated terminology. We’ll walk you through each aspect of investing so you can feel confident that you’re making the right decisions to reach your goals. Schedule a consultation to get started.