What the Magnificent Seven Tell Us About Risk Management

Investors often worry when their portfolio becomes too concentrated in too few holdings, with the understanding that concentration risk can heighten overall volatility and risk.

So, what happens when the S&P 500 itself becomes too concentrated in too few stocks?

It adds volatility to the system as a whole and skews the market by placing too much influence in the hands of too few companies.

That’s exactly what’s happening right now with the so-called Magnificent Seven. Those seven stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — are collectively up more than 100% since late 2022 and account for some 60% of the index’s return over the last year.

Those all-time highs you’ve been seeing in the markets? You can thank the Magnificent Seven for them.

It’s because the S&P is weighted by market capitalization, enabling the largest companies to contribute more to the index’s overall performance than smaller companies. With a total market cap of nearly $13 trillion combined, the members of the Magnificent Seven are some seriously large companies.

That’s good when the seven are doing well, as they can lift the whole market. It’s not so great when they struggle and drag things down.

But, regardless of the movement of the market, this kind of concentration in just a handful of companies – all generally part of one industry, Technology – introduces potential volatility into the market.

All of this adds up to outsized influence and broader market volatility based on just a handful of companies.

Keep in mind that volatility and risk can arise from various sources. It’s not a matter of predicting whether all or none of the ‘Magnificent Seven’ will succeed or fail; rather, it’s about vigilant risk management. Volatility is often considered the investor’s greatest adversary, influencing portfolio stability and performance. Our role is to monitor these fluctuations closely every day to mitigate risks. By managing volatility, we aim to ensure a steadier and more predictable investment journey for you and your clients.