The “Magnificent Seven” and why bigger isn’t always better in investing

If you’re interested in the world of investing, you may have heard a lot of buzz about the “Magnificent Seven” recently.

The name, lifted from the classic western movie, describes seven popular tech stocks including Apple, Microsoft, and Tesla. These companies have experienced rapid growth in recent years and unsurprisingly, many people are rushing to invest in them.

Buying into the most profitable businesses in the world during a period of rapid growth might seem like a no-brainer. But is investing in the Magnificent Seven really a guaranteed win?

Bear in mind that nobody can see the future and there are no guarantees in investing. That’s why it’s important to do due diligence and tune out any noise about “the next big thing”.

Read on to learn more about the Magnificent Seven and why bigger isn’t always better in investing.

The value of the Magnificent Seven is the same as the combined economies of 5 countries

The Magnificent Seven is a group of seven “mega-cap” tech stocks. According to the Financial Industry Regulatory Authority (FINRA), mega-cap stocks are those from companies with a market capitalisation – the total value of a company’s outstanding shares, including publicly traded and restricted shares – of at least $200 billion.

The seven companies are:

  • Apple
  • Microsoft
  • Tesla
  • Alphabet (Google)
  • Amazon
  • Meta Platforms (Facebook)
  • Nvidia

You likely recognise most of these tech giants as they are among the most profitable businesses in history.

According to the Guardian, these companies make up the same proportion of the global market as the combined economies of Canada, France, China, Japan, and the UK.

Additionally, the collective value of the Magnificent Seven more than doubled last year. So, it’s no surprise that investors are excited about these stocks.

However, you could expose yourself to a significant amount of risk if you focus all your investments on the Magnificent Seven.

The Dutch East India Company was worth $7.9 trillion in today’s terms

Microsoft is currently considered the most profitable company in history. According to Reuters, it overtook Apple as the world’s most valuable business in January 2024, with a valuation of $2.859 trillion.

Looking back in history, this isn’t the first time that a company has seen this kind of rapid growth. Yet many of the businesses that once dominated the global markets in the past ultimately failed.

For example, the Dutch East India Company, established in 1602, far surpassed the value of Apple or Microsoft. The Visual Capitalist reports that, at its height, the Dutch East India Company was worth 78 million Dutch guilders.

This translates to $7.9 trillion in today’s terms.

However, despite being the world’s largest business, and effectively the first company to issue stock, the Dutch East India Company went bankrupt and folded in 1799.

Naturally, the global economy now looks much different to what it did back then, and it is difficult to draw comparisons between the Dutch East India Company and modern tech businesses.

Still, the story does demonstrate that no company is immune from failure – even one that forged empires and shaped global history in the way the Dutch East India Company did.

Indeed, if you look back to the year 2000, you’ll find that many of the most successful companies are now struggling to stay relevant in the modern market.

For example, according to Investment News, the list of the biggest companies in the world included the fledgling mobile phone manufacturer, Nokia.

In fact, Microsoft was the only top company from 2000 that maintained its position on the list in 2023.

If we look back further to the top 10 companies in 1980, IBM was the only tech company on the list. The rest are primarily oil and gas manufacturers that, while still profitable businesses, may be becoming less relevant as the world moves towards more sustainable energy sources.

So, even though tech is a central part of our lives and the Magnificent Seven might seem as if they are too big to fail, they could be all but forgotten 10 years from now as market trends change.

The Magnificent Seven could overexpose you to tech

Diversifying your investments across different asset classes, industries, or geographical areas could be an effective way to manage risk. Spreading your investments in this way may mean that gains from certain investments balance out your losses elsewhere.

It’s important to consider this before investing in the Magnificent Seven because you could overexpose yourself to tech.

This may not be an issue while these companies are experiencing rapid growth. However, markets are always changing, and different industries have dominated the economy at various times throughout history.

As a result, there is a distinct possibility that the Magnificent Seven and similar tech companies could face difficulties in the future. If your portfolio is not well-diversified, this could affect your ability to meet your long-term financial goals.

Consider your own financial plan when making investment decisions

It’s easy to be tempted by the latest trends such as the Magnificent Seven, but it’s important to take a measured, personal approach to investment decisions.

You typically need to think about your financial aims and your attitude to risk and make investment decisions that are suitable for your own unique situation.

You may also find that working with a financial planner could help you create financial goals and choose investments that align with those goals.

Get in touch

If you want to explore investment options to help you achieve your financial goals, we can help.

Please give us a call on 01276 855717 or email today for more information.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Figures quoted in this article were correct as of March 2024.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Past performance is not a guide to future performance and should not be relied upon.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Approved by the Openwork Partnership on 19/03/2024