Investing - Theory, News & General • Re: The Magnificent 7 and the Boglehead philosophy: isn't this an unreasonable concentration in a single sector?

I generally agree with the benefits of a market weight portfolio, but the size of the Mag 7 stocks have me concerned. They now make up 35% of the S&P 500, and consequently a large part of my portfolio. They are also concentrated in a single sector: technology.

No, they aren't. That's just not so and I'll be saying more about that below.

The general advice over the years has been to avoid having a portfolio concentrated on a few stocks, or a single sector. But isn't that exactly what has happened us indexers with the Mag 7? Those of us who have been holding a market weight portfolio over the last few years now have, for better or worse, a portfolio very concentrated in a handful of tech stocks.

Doesn't this run counter to the Boglehead principle of having a well diversified portfolio? For those older investors, was there another time where we saw an index so heavily weighted towards a few stocks in a single sector like this?

I continue to stick with our international allocation for diversification, but I'm growingly increasingly concerned about the concentration of the Mag 7 in our US equity allocation and wondering if it makes sense to add some small and mid-cap?

Obviously I can't predict the future, but history tells us that individual stocks can't keep going up exponentially forever, and I just want to have a little more ballast for when the market corrects or the Mag 7 crash.

It's just the structure of the stock market as it actually exists.

The basic decision is "do I want to mirror the composition of the stock market as it actually exists?" For many investors, the answer is "no." For indexers, it is "yes."

There is never a time when the actual composition of the market doesn't look crazy. My Total Stock Market is full of things I don't want and never would pick myself. Intuition strongly suggests that you can improve on the market portfolio with just a bit of ordinary gumption. Intuition seems to be wrong.

The main thing the Magnificent Seven have in common is just recent high performance. They are not really a coherent group of companies with strongly similar characteristics. They don't have perfect correlation with each other and they don't move up and down in lockstep.

They belong to three different sectors.

Apple, NVIDIA, and Microsoft are held in VGT, the Vanguard Information Technology ETF;
Google and Meta are held in VOX, the Vanguard Communications Services ETF.
Amazon and Tesla are held in VCR, the Vanguard Consumer Discretionary ETF.

I would not want to call the seven of them "diversified," exactly, but they aren't septuplets, either. NVIDIA is a chipmaker, Tesla is a chip user... but so is every other car manufacturer nowadays.

Netflix (not NVIDIA!) was the "N" in FAANG. It used to be bracketed with the others. It's still a highly successful stock if you look at it in isolation but it's now barely in the top 25. It quietly sagged out of the group at the top, proving a) that it was different from Apple or Facebook, and b) that it's quite possible for companies at the top to lose their elevated status without crashing the market as a whole.

Statistics: Posted by EnjoyIt — Wed Dec 25, 2024 1:06 pm