A handful of tech giants stole the show in 2024. Just a few months into the new year, they’ve fallen hard, and their stumble is a powerful reminder of why investors shouldn’t put all their eggs in one basket.

Commonly referred to as the ‘Magnificent 7,’ the group includes household names like Apple, Microsoft, Meta (Facebook), NVIDIA, Tesla, Amazon and Alphabet (Google). By the end of the year, they comprised the largest holdings in the S&P 500 Index, a popular representation of large-cap stocks in the U.S. While the index left other asset classes in the dust with a 25% return last year, it was the Magnificent 7 that led the charge with a staggering 48.3% gain.

Given how well these stocks have done, why would investors bother owning anything else? The answer is that while piling into the recent top performers can be alluring, such a strategy carries elevated risk. We have seen a clear example of this risk in 2025. U.S. stocks have been under pressure as the market navigates the uncertainties related to the newly announced tariff regime. The Mag 7 stocks have been under particularly severe pressure so far in 2025. As the chart below highlights, these companies, on average, are down -27.8% year-to-date, compared to a decline of just -11.9% for the broader S&P 500 Index.

Source: Morningstar Direct. Returns are year-to-date as of 4/21/2025 and include dividends.

The above chart demonstrates the value of diversification. Owning a broad basket of stocks typically results in a dampening of the exaggerated swings that can occur in individual companies. The large number of stocks in the S&P 500 Index shown above have collectively been less volatile and delivered a smaller loss than the Mag 7 stocks this year.

Of course, a diversified investor still owns the Mag 7 stocks. That is the beauty of the approach. Last year when those companies were on a tear, diversified investors participated. Performance would have lagged an investor that was highly concentrated, but that’s ok. This year, the downside is mitigated, and the diversified investor isn’t constantly faced with the decision of whether it’s time to own different stocks. 

One thing many investors don’t fully appreciate is that owning an S&P 500 Index fund is still a fairly concentrated position. Even though the index holds hundreds of stocks, it’s not fully diversified. That’s because it only includes large U.S. companies, which is just one slice of the broader investment universe. Stocks in the same category often move together, which limits how much diversification can smooth out the ebb and flow in prices.

To take diversification a step further, investors can look beyond U.S. large-cap stocks by incorporating additional asset classes. International stocks, bonds, and cash each respond differently to market forces, offering unique benefits. The chart below highlights how these different asset classes have performed this year.

Source: Morningstar Direct as of 4/21/2025. The May 7 Average return is based on a simple average of the 7 constituents. International stocks were represented by the MSCI ACWI Ex US TR Index. Bonds were represented by the Bloomberg U.S. Aggregate Bond Index, and cash was represented by the Bloomberg Treasury Bill 1-3m Index.

A simple portfolio balanced across these options, as outlined below, would have reduced portfolio volatility and brought the drawdown to a mere -3.0%. That is a notable improvement over the S&P 500 and a substantial one relative to the Magnificent 7 allocation.

Example Balanced Portfolio Weights:

• 39% S&P 500 Index
• 21% International Stocks
• 39% Bonds
•   1% Cash 

A key thing to understand is that while diversification can deliver a substantial benefit to investors, it comes at a cost. Or, more accurately, an opportunity cost. By design, a diversified portfolio is guaranteed to underperform its top-performing asset(s). From time to time, a small subset of holdings can dramatically outperform other asset classes for an extended period. When this occurs, the opportunity cost can feel like a high price to pay. In those moments, it’s easy to forget why we diversify. Bouts of heavy volatility like we have experienced this year serve as a reminder.

With a diversified portfolio, investors don’t have to play the loser’s game of picking individual stocks. Broad exposure ensures the winners are represented within the portfolio. Importantly, the relatively smoother ride of a diversified portfolio makes it easier for an investor to remain in their seat when a bump in the road feels like a roller coaster.  

Source: MarketWatch

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