The Magnificent Seven giant U.S. tech stocks—Apple, Google parent Alphabet, Amazon, Nvidia, Meta Platforms, Microsoft and Tesla—have been on quite a roll. As of July, they made up 35% of the S&P 500 Index. Is that too big a slice? And what can individual investors do about it? We asked Ackert, a finance professor, for some perspective.
1. Ackert teaches at Kennesaw State University in Georgia, and she says that, “after the Great Depression until the early 1960s, there were another Magnificent Seven”—AT&T, DuPont, GE, GM, IBM, Standard Oil and U.S. Steel. And in the late 1800s, she says, a relative handful of U.S. railroad stocks were “real dominant.”
2. It’s hard to tell if a stock or index is overvalued, but Ackert is a fan of Yale economist Robert Shiller, who studies historical cyclically adjusted price-to-earnings ratios. If P/E ratios are too high, “that’s definitely an indication that things look a little frothy.” And she says some P/E ratios for Magnificent Seven companies have been “through the ceiling” in recent years.
3. Passively managed U.S. mutual funds and ETFs, which track indexes, surpassed actively managed ones in value in 2021. Watching all the stocks in an index can be time-consuming. So, can an investor diversify and limit risk by choosing an actively managed mutual fund or ETF instead of an index fund? It might not be that simple.
4. Ackert and Western University professor George Athanassakos published papers in 2000 and 2021 that found seasonal patterns among active managers: Many sell big companies early in the year and load up on nimble small-caps to try to beat their benchmark index, then revert to big ones later to match the index and preserve their annual performance pay.
5. How worried should you be about yearly seasonality? “For most average investors saving for retirement, just tracking the index and having that long-term goal is perfectly fine,” Ackert says. If you think the Magnificent Seven are overvalued, or the whole U.S. market, diversify internationally. “It’s so easy to do with ETFs and mutual funds,” she says.
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