Angst over the Magnificent 7
🔸 Plus: Lionel Messi’s used napkin sells for $965,000 🔸 You’ll soon be able to buy shares in Shein 🔸 The finances of Queen, the band 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,277.51 ⬆️ 11.27%
FTSE 100: 8,275.38 ⬆️ 7.38%
Bitcoin: $69,160.30 ⬆️ 56.46%
GBP to USD: $1.2713 ⬇️ 0.11%
GBP to EUR: €1.1734 ⬆️ 1.76%
Should you worry about the Magnificent 7?
The whole purpose of investing in an S&P 500 exchange-traded fund is to give yourself the benefit of diversification: In an S&P ETF, you’re spreading your money between 500 different companies. Some will do poorly but most will do well. You’re thus likely to come out a winner. (This year, the S&P 500 is up 11.3%.)
Crucially, you don’t have to guess which companies are going to perform well — because you’re betting on all of them. You won’t be dependent on the fortunes of a handful of companies to make or break your plan.
But this year some people are worrying that the S&P 500 has become dominated by a small number of companies: the so-called “Magnificent 7”.
The seven companies are Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla. They account for roughly 30% of the value of the entire S&P 500.
A huge chunk of the value of that 30% is being driven by one stock, Nvidia, which makes chips for AI companies. Nvidia is up 128% this year. The company has added an astonishing $350 billion in market value since its last earnings call.
This is not how diversification is supposed to work. It’s not really how ETFs are supposed to work, either. At the moment, a bet on the S&P 500 is mostly a bet on tech stocks.
Is this a bad thing?
Some people think so. The S&P has risen over 40% since October 2022 and they are wondering if stocks have entered a bubble driven largely by the Magnificent 7. How high can this market go? How far might it fall?
Stocks do become periodically overvalued. Just look at the S&P over the last five years. There have been ugly pullbacks twice.
But anyone who kept putting a little money from each paycheck into the market, even during the dips, eventually did well. (You’d have beaten the market, too, because the extra stocks you bought during the downturn would magnify your gains on the upturn.)
Staying on the sidelines while you try to guess when the market is going to crash is a fool’s game.
More importantly, the Magnificent 7 stocks aren’t literally in a bubble because we know that the companies they represent make real things that have real value. People aren’t going to stop buying Apple’s iPhone tomorrow. Tech companies really do need Nvidia’s high-powered chips to run their data centres. You are not going to stop using Google, Amazon, Instagram, or Whatsapp anytime soon.
Their stock may be temporarily overvalued, but if you want to build wealth you have to be in this for the long run. Trying to buy low and sell high is a good way to lose money quickly.
Winning is OK
So it’s OK if the S&P is sometimes dominated by a few outsized winners. In fact, the whole point of buying an index fund is to make sure you capture these winners.
Lastly, Nvidia has made a lot of headlines but it’s not the biggest gainer of the year so far. That honour belongs to … Vistra. If, at the start of the year, you guessed that an energy utility based in Irving, Texas, was going to be the best investment of the year — congratulations!
But let’s be real — most people had never heard of Vistra until now.
The mere existence of Vistra proves the point: Even if a handful of tech companies dominate the S&P, there are hundreds of other companies in there that can go on unexpected winning streaks.
That’s why passive investing in ETFs is such a powerful tool for the small investor — you don’t have to guess. You just set-it-and-forget-it and let the S&P 500 figure it out for you.
The Moneyin2 Guide to Wealth
Want to know more about how to save, invest, and build wealth for long-term financial security and independence?
The Moneyin2 Guide to Wealth covers everything about money, saving, and investing that you should have been told by your parents, teachers or employers — but weren’t.
The Moneyin2 Guide to Wealth is only available to paid subscribers. Subs start at just £8.
In return you’ll receive the benefit of a lifetime of advice, in plain English, from the Moneyin2 team. It’s insight that professional personal finance advisers typically charge hundreds or thousands of pounds for.
The Moneyin2 Guide to Wealth includes:
How to start saving when you’ve got no money.
Should you pay off debt or start saving first?
Check your bank account for parasites.
All the code words that mean ‘free money’.
Stocks & Shares ISAs: The tax-free savings account everyone ignores.
How ‘compounding’ can make you a millionaire.
The secret of ‘passive investing’: How to get rich by being lazy.
Why you need a SIPP: The savings account with a guaranteed 20% return.
Pension v SIPP v ISA: Which is best?
Use a Lifetime ISA - the savings account with a 25% return - to buy a house.
The 'home bias' error in investing.
How to invest when stocks hit all-time highs.
And for dessert …
Lionel Messi’s used napkin sells for $965,000. It was the napkin on which, in the year 2000, a deal was sketched to sign the 13-year-old to FC Barcelona.
The finances of Queen: The surviving members of the band have a company that handles their royalties and you can see their accounts on the Companies House website. In the last fiscal year, they earned a profit of £18 million on sales of £41 million.
You’ll soon be able to buy shares in Shein. The fast-fashion company, which is frequently the target of complaints about its ethics, plans to file for an IPO in London. It is expected to be valued at around £52 billion.
Gen Z grads don’t want jobs in the tech sector anymore. They’d rather work in education because they get long holidays, a survey says.
There’s a reason so many British celebrities like Alexei Sayle, Helen Lederer, John Cleese, and Eric Idle continue to perform into their 70s and 80s: It’s because they’re poor, they say.
They’re going to kick Ocado out of the FTSE 100. Barring a miracle, its stock has fallen so far it will be excluded.
This is (allegedly) Wall Street’s best-dressed man. Judge for yourself.
More from Moneyin2:
We want to hear from you!
What money issues do you want us to tackle in this newsletter? Let us know at jim@moneyin2.com.
Follow us on social media
Facebook, TikTok, Instagram, Twitter, and Threads.
Partner with us!
If you want to sponsor Moneyin2 get in contact here.