One mental trick you can use if you want to invest in the S&P 500 but don't like the “Magnificent Seven”

The Magnificent Seven stock has been a hot topic lately. There's a good reason for that.

This term was created by american bank Analyst Michael Hartnett is often used to describe seven large technology-focused companies. apple (AAPL -0.36%), microsoft (NASDAQ: MSFT), alphabet (NASDAQ:GOOG)(NASDAQ:Google), Amazon (NASDAQ:AMZN), meta platform (NASDAQ:Meta), Nvidia (NASDAQ:NVDA)and tesla (NASDAQ:TSLA). All seven companies are industry leaders and have unique influence. But in 2023, the importance of this group changed.

Last year, The Magnificent Seven grew by an impressive 48.2% on the low end (Apple) and 238.9% on the high end (Nvidia). Even more surprising is its pure value creation.

Entering 2023, the total value of the Magnificent Seven was $6.92 trillion. Entering 2024, that value has ballooned to…wait for it…$12.4 trillion. More than $5 trillion in value was created in one calendar year.

Fast forward to today, the Magnificent Seven represents 28.4% of the world. S&P500. For comparison, the technology sector as a whole makes up 29.2% of the S&P 500 (Amazon, Tesla, Alphabet, and Metaplatform are not included in the technology sector). If you buy an S&P 500 index fund, as many people do, a significant portion of your investment is actually invested in the Magnificent Seven.

Some investors may feel these companies are overvalued, or at least be looking for other opportunities. But in reality, the American economy is heavily dependent on these companies. And they are the main reason why the US economy is doing so well compared to international markets.

Here are some simple mental tricks to deal with investing in The Magnificent Seven.

Image source: Getty Images.

new normal

One of the biggest mistakes investors make is underestimating the spiritual aspect of investing. When stock prices fall, the fight-or-flight response kicks in.

People want to take action by exchanging ways to avoid a sell-off (fight) or by selling everything and walking away (fly). However, both of these responses have proven harmful in any bear market. The best course of action is to suppress your instincts and do nothing.

In a bull market, it can be tempting to follow the crowd and buy stocks to ride the wave. But again, it's better to have a balanced approach by focusing on companies you understand and believe in over the long term, rather than buying popular stocks just because you think they'll go up. .

I have been observing the stock market for a long time. And the reason I wrote this article is because the S&P 500 frankly makes me uncomfortable. Perhaps more than ever.

The composition of the S&P 500 changes as only a handful of companies account for the majority of the market value. It's even more lopsided on the Nasdaq 100, with the Magnificent Seven accounting for just under 40% of its value. The market feels more abstract than ever, as most of the value lies in companies that either don't make products that people don't see or whose business is only related to the digital world. Never before has so much of the market capitalization of the S&P 500 been concentrated in high-tech companies.

Just a decade ago, the top 10 most valuable companies by market capitalization were, in order, Apple; exxon mobilAlphabet, Microsoft, berkshire hathaway, johnson & johnson, walmart, chevron, wells fargoand procter and gamble. Five years ago, he didn't have a single company worth more than $1 trillion. Currently, five of the Magnificent Seven have a market capitalization of over $1 trillion, with Meta Platform within range, and Tesla previously had a market cap of over $1 trillion.

portfolio tax

It's fun and free to pick individual stocks and make contrarian investment decisions. But not wanting to invest in the stock market just because you completely disagree with the market's trajectory or don't like the companies that are driving the market up is going too far.

I'm not a fan of the Magnificent Seven's dominance, but I also think it's a mistake to challenge them. In fact, I think he wants to buy some shares of the Magnificent Seven in 2024. So I'm not going to stick my nose into every stock.

But the idea of ​​simply taking a slice of the investment and accepting it as something out of your control can help make the decision easier. After all, the amount invested in those stocks is huge. His $3,525 investment in the S&P 500 index fund effectively equates to $1,000 in the Magnificent Seven and $2,525 in the rest of the market.

The biggest lesson, or reality I've come to terms with, is that if you're going to invest in the U.S. stock market, you have to accept the importance of these companies and the influence they have. After all, if Magnificent Seven stock is selling, there's a good chance most of the market is also selling.

The value of the U.S. stock market is dependent on large technology companies. Concise and simple. Running away from this reality just because it makes you uncomfortable is the wrong thing to do.

By thinking of the Magnificent Seven as a portfolio tax, I set it up for myself so that I wouldn't be annoyed if I were to be sold. For example, if the Magnificent Seven plummeted by his 50% and the S&P 500 fell by his 14% from the Magnificent Seven alone, I would already view that part of the investment as something outside of my control. So I'm not too upset. Similarly, if the Magnificent Seven continues to outperform the S&P 500 and get bigger and bigger, I'll be glad I didn't go against the flow.

find what suits you

The best way to invest is to be patient and believe that the S&P 500 is generally correct, if not perfect, while leaving room for creativity. Becoming too contrarian and moving upstream against the market can backfire and result in poor returns. Unless you're an extremely risk-averse investor focused on passive income or supplementing your retirement income, it pays to have at least some exposure to big tech, even through indexes or exchange-traded funds.

If you're like me and think the Magnificent Seven is generally overvalued, the idea of ​​relinquishing control of your index fund investments may work for you. It may sound a little silly, but the psychological side of investing is anything but. When stock market volatility spikes, being able to control your emotions can be the difference between staying on track and making a disastrous financial decision. Like it or not, ignoring the Magnificent Seven would have been a huge mistake in 2023, and may continue to be a mistake in 2024 and beyond.