Is It Time to Sell the 'Magnificent 7'? — Advisors' Advice

2. It's time to diversify.

Our firm works with tech professionals and so they feel this acutely. We are recommending selling a significant chunk of long-term company stock. With the current enthusiasm in AI and the "right sizing" happening, now is the time to reduce concentration and diversify!

3. Risk tolerance matters.

I believe it to be purely situational and determined based off of the client's overall risk tolerance and financial goal(s)/plan. If there is an opportunity to trim some of the gains in a tax-efficient manner and reallocate toward "safer" investments strategically then from a rationale perspective that makes sense.

Some investors are more aggressive in nature and want to ride the wave to the tip and then try to make adjustments. The problem with this approach is that you're then trying to time the market and I don't necessarily condone that or believe in "market timing.”

In the same token, for the aggressive minded investors there are investment solutions in the marketplace that offer the same level of aggressive approach and offer downside protection up to certain thresholds (i.e., registered index-linked annuities or structured notes) to help offer the investors upside growth opportunities with some downside safeguard(s).

4. It might be time to rebalance.

Scientific Financial doesn’t recommend targeted selling of the Magnificent 7 tech stocks despite their very high valuations. Trying to predict future market trends often leads to disappointing results for investors.

Instead, we use these high valuations to highlight risks and remind clients of the value of diversification, particularly international stocks which are much cheaper than U.S. stocks today. We encourage clients to always maintain a diversified portfolio resembling the world markets, but for those who have become concentrated on U.S. tech stocks, now seems like a perfect time to rebalance.

5. Look at the big picture.

First and foremost, we want our clients to always be aware of what’s going on to the extent they’re interested. While they should be aware of the high valuations of the "Magnificent 7" tech megastocks, we advise clients not to focus solely on these and recommend owning a portfolio that looks a lot like the global market. Why? This allows them to not focus so heavily on what one stock or another is going to do.

Market dynamics are complex and concentrating investments in a few high-value stocks can expose investors to unnecessary risk. Instead, we encourage looking at a mix of asset classes and sectors to mitigate volatility and enhance long-term growth potential. If a large portion of your portfolio, say 10% or more, this is a great time to take profits or reduce risk. If you are looking at a long-term approach you don’t necessarily need to avoid these companies because of the valuations.

For those concerned about the current valuations, it’s important to zoom out and think about the bigger picture. If the stock dips, does it keep you up at night? Could your financial picture be wiped out by these companies alone? If so, it’s time to evaluate a change.

6. It’s a good time to sell.

The last time a handful of stocks exerted such a force on an index as the magnificent 7 was in 2000, at the height of the tech bubble. The top five stocks were Microsoft, Cisco, ExxonMobil, GE and Intel; representing 18% of the index, but after they all crashed in 2001, all but Exxon did not recover for well over a decade and GE has never recovered.

Today the Magnificent 7 that drove the S&P index down in 2022 and up in 2023 appear overvalued by various profitability metrics; the other 493 stocks may not be, and while momentum can continue to drive these stocks up, we think this is a good time to sell at least a portion of these stocks and move into stocks more appropriately valued based on metrics such as revenue, free cash flow and companies that pay dividends.

7. If allocations match targets, no need to rebalance.

I'm primarily focused on the current pricing in relation to future growth, and less worried about a selloff in the near term. I believe that while prices for the Magnificent 7 will remain steady, other parts of the market will pick up the pace of growth.

Currently, many of my clients have sufficient exposure to the Magnificent 7 through index funds, so there's a limited need for additional positions outside of those.

As long as the allocations in these funds align with their targets, I'm not rebalancing solely due to the composition made up of the Magnificent 7, either, as overweight as it may seem to be at the present moment.

8. Sell some, keep others.

We think the highly correlated stocks returns of the Magnificent 7 during 2023 have created a significant opportunity for active investors into 2024. There are meaningful fundamental differences between these companies, which allows investors who own portfolios comprised of individual stocks (as opposed to ETFs or index funds) an opportunity to add or protect value by continuing to hold some of the Magnificent 7 and sell or reduce others.

We do not currently hold all seven of the stocks in client portfolios due to deteriorating fundamentals and/or unattractive valuations, while we continue to hold large positions in the names that are showing accelerating fundamentals and attractive growth-adjusted valuations.

We believe the market will continue the recent trend of differentiating between the Magnificent 7 through 2024; these stocks are no longer a monolith and believe nimble active investors will be rewarded this year.

9. Look at market risks.

We're always concerned, but with so much concentration in a handful of names, it heightens the volatility and risk. We're still overweight technology, but we're keeping a close eye on interest rates and the Fed in case the situation turns quickly. With a high degree of concentration, we believe binary risks such as China raise the risk of impact that geopolitical concerns can have on the markets overall.

10. Consider hedging instruments.

While valuations are important, at Ironclad Financial, we prioritize a holistic approach, factoring in concentration risk, time horizon and specific client goals. For clients contemplating profit-taking, strategies like covered calls or collars can help manage volatility and establish a risk-defined outcome range.

Additionally, purchasing covered puts may suit those seeking to hedge against significant stock drawdowns, aligning with their risk capacity or investment preferences.

11. Take profits only if needed.

I am not overly concerned with their valuations. Reality is reality at the moment. They have performed well for a long time over the long term and they are highly sought after. So demand is reflected in the price.

I typically tell people to only take profits when they need it or to rebalance etc., not in trying to time the market. If their prices do go down or become stagnant, diversification was already inputted in for that risk. The eggs were never in one basket.