Tesla, Nvidia, Apple, Amazon, Meta Platforms, Microsoft, and Alphabet make up the modern-day Magnificent 7 which have not just dominated the S&P 500 index in the US, but also the world indexes. These 7 companies represent 30% of the value of the whole S&P 500 index according to Goldman Sachs and given that there are a further 493 stocks in the S&P 500, shows you the power of these companies. You cannot underestimate the picture this paints, especially with such a bumper year of growth in these companies growing 120% collectively in 2023 with between 50% and 250% growth within the 7. Justin Pope suggests in the Motley Fool that ‘it is hard to bet against this momentum continuing in 2024’, however, we believe that it is more important than ever to diversify in order to guard against what may be something of a bubble.

If we are looking for a common theme behind the success of these firms, we can see their focus on AI and being in the right position to benefit from it in the coming years. We cannot know how this forward projection of growth reflected in the share prices of the Magnificent Seven will be supported as AI takes grip of the way we live and work, but we do know it is here to stay. For those of us who experienced the original dotcom bubble that burst in March 2000, there is more than a whiff of the same in this instance. As quickly as the share prices have increased in value, there is also the danger it can go in the opposite direction just as quickly.

The power of so few companies, which together represent more than the size of the UK, Japanese, French, Chinese and Canadian stock markets combined, presents an optical illusion when viewing personal wealth.  If your portfolio were to have been a passive plan holding the world’s largest companies, you would have had an incredible year in 2023.  Most other portfolios even with a reduced percentage of holdings in the Magnificent Seven will have benefited from their good fortune.  However, there is an inherent danger of being ‘over-exposed’ in so few companies.

Good financial planners will contend with a strict investment philosophy where they ensure that client portfolios are well-diversified and not beholden to a small number of stocks. Yes, it is fantastic to get good growth in a portfolio but it is even more important to protect it.

For help and advice relating to financial planning please contact Mark Jones of TWP Wealth Management mark@twpwealthmanagement.co.uk