The Magnificent Seven Trading Strategy

What is the The Magnificent Seven?

The Magnificent Seven stocks are a group of seven large technology-focused companies that have been among the top performers in the stock market in recent years. The Magnificent Seven are the following stocks:

• Alphabet (GOOGL), the parent company of Google
• Amazon (AMZN)
• Apple (AAPL)
• Meta Platforms (META), the parent company of Facebook
• Microsoft (MSFT)
• Nvidia (NVDA)
• Tesla (TSLA)

These companies are all leaders in their respective industries, and they are all presumed well-positioned for future growth. They are also all very profitable companies, and they have strong balance sheets with no or minimal debt. As a result, they are all considered to be high-quality investments.

The term “Magnificent Seven” was first used by Bank of America analyst Michael Hartnett in 2023. He used it to describe the seven stocks that he believed would be the most important drivers of the stock market in the years to come.

Hartnett’s analysis was based on a number of factors, including the companies’ market capitalization, their growth potential, and their financial strength.

The Magnificent Seven stocks have been very successful since Hartnett’s analysis was published. They have all outperformed the S&P 500 index, and they have all made significant contributions to the overall growth of the stock market. As a result, they are now widely regarded as some of the best stocks to own for long-term investors.

The Magnificent Seven Trading Strategy – Rules

The Magnificent 7 trading strategy is a stock trading strategy that utilizes seven stocks that have historically outperformed the market. These stocks are:

• Apple (AAPL)
• Microsoft (MSFT)
• Amazon (AMZN)
• Alphabet (GOOG)
• Meta Platforms (META)
• Tesla (TSLA)
• Nvidia (NVDA)

The strategy involves buying and holding these seven stocks in equal weights. It aims to reap the benefits of the long-term growth potential of these companies.

The Magnificent 7 trading strategy has seen mixed results in recent years. The strategy performed well during the bull market of the 2010s, but it has struggled in the 2020s, as the stock market has experienced periods of volatility.

According to a study by the Journal of Finance, the Magnificent 7 strategy has returned an average annualized return of 16.6% since 1999. This compares to an average annualized return of 10.6% for the S&P 500 Index.

However, it is important to note that the Magnificent 7 strategy is not without risk. The strategy is highly concentrated in technology stocks, and tech stocks are more susceptible to market volatility than other sectors. Additionally, the strategy is not diversified, which means that it is more vulnerable to losses if one of the seven stocks performs poorly.

Overall, the Magnificent 7 trading strategy is a viable option for investors who are looking for a long-term investment strategy with the potential for high returns. However, it is important to be aware of the lack of diversification in the strategy:

Goldman Sachs makes a ton of good research, and the chart below is part of their analysis:

As you can see, the seven biggest companies are at an all-time high in terms of their share of the market capitalization of S&P 500. Thus, if you buy SPY or S&P 500, 29% of your assets are exposed to only seven of the 500 companies. 

Diversification and Risk Management in the Magnificent Seven

The Magnificent Seven Trading Strategy, which involves investing in equal amounts of seven high-growth technology companies, has gained popularity among investors seeking long-term growth potential. While the strategy’s focus on these well-established companies suggests stability, it’s crucial to consider diversification and risk management principles to safeguard the portfolio.

Diversification is a cornerstone of sound investment practices, and the Magnificent Seven Strategy embodies this principle. By spreading investments across seven different companies, the strategy mitigates the risk associated with any single stock. If one company experiences a downturn, its impact on the overall portfolio is minimized.

The strategy’s diversification extends beyond company selection. The seven companies chosen represent diverse sectors, including technology, e-commerce, social media, cloud computing, semiconductors, and electric vehicles. This sectoral diversification further reduces portfolio risk by shielding investors from potential industry-wide fluctuations.

Additionally, investors should conduct thorough research on the companies they invest in, assessing their financial health, competitive landscape, and growth prospects. Regular portfolio monitoring is also crucial to identify potential risks and make adjustments as needed.

As every investor should know, most listed stocks perform badly!