Editor's note: One "basket" of stocks has nearly doubled the return of the S&P 500 Index this year. But according to Vic Lederman, the editorial director of our corporate affiliate Chaikin Analytics, investing in just one basket isn't a good way to generate consistent, long-term returns. So in today's Weekend Edition, we're taking a break from our usual fare to share one of Vic's essays, recently published in the free Chaikin PowerFeed e-letter. In it, Vic explains why serious financial pain could be in store for investors who use a one-basket approach.
Don't Put All Your Eggs in This Popular Basket By Vic Lederman, editorial director, Chaikin Analytics
Huckster Jordan Belfort made a fortune selling "pink sheet" penny stocks to unsuspecting investors... You've probably heard of Belfort before. Leonardo DiCaprio portrays him in the hit movie The Wolf of Wall Street. Belfort thought he had the system beat. But he made one fatal mistake... His contingency plan was to store most of his ill-gotten wealth in Switzerland. Belfort put the money in an account named after his wife's aunt. He did it to avoid his wealth being confiscated by the feds in case he got caught. It was a near-perfect plan... But then his wife's aunt unexpectedly died of a stroke in 1999. That shut him out of his offshore account holding his wealth stockpile. Belfort made the big mistake of putting all his eggs in one basket. By that, I mean he deposited all his backup savings into one account under one person's name. And it wasn't even his name. Most Americans don't own a Swiss bank account, let alone one under someone else's name. But a majority (62%) do own stocks... And they're always looking for ways to outperform the market. These days, one particular "basket" of stocks gets most of the attention for folks chasing outperformance...
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I'm talking about the so-called "Magnificent Seven." Regular readers know all about this group of stocks. They're seven of the world's largest companies listed in the U.S. This list is made up of Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA). Combined, they have a colossal market cap of more than $16 trillion. To put that in perspective, that's roughly 30% of the value of the entire U.S. stock market. All seven companies are part of the S&P 500 Index, in which they also have a combined weighting of about 30%. That's an average weighting of more than 4% for each. The other 493 companies in the S&P 500 each carry an average weight of just more than 0.1%. Each Magnificent Seven stock is about 30 times more significant than the other 493 companies. Because of this, the Magnificent Seven became a basket of investments. And as you would expect, there's an exchange-traded fund focusing solely on these seven companies. It's called the Roundhill Magnificent Seven Fund (MAGS). And it has boasted big gains this year... Since the start of 2024, MAGS is up 47%. That's nearly double the 22% return of the S&P 500 over the same time frame. Take a look... Folks, a 22% return for the broad market in less than a year is impressive. But making nearly double that from seven stocks picked from the same basket is mind-boggling. Thanks to these big gains and all the media attention on the Magnificent Seven, it's no surprise that ordinary investors are pouring into the fund. Back in January, MAGS had $69 million in assets under management ("AUM"). Today, it has around $795 million in AUM. People investing heavily in MAGS, or assembling their own "Magnificent Seven basket," are clearly hoping to continue the amazing stretch of market-beating returns. They're putting their eggs in one small basket. However, if three companies in this basket have a bad quarter, the entire group takes a big hit. But if three companies in a basket of 500 companies have a bad quarter, it's more of a hiccup. Investing in the smaller basket is a big risk to take. And the Power Gauge sees trouble ahead... The Power Gauge is a tool we use to gather a wide array of investment fundamentals, technicals, and more into a simple, actionable rating such as "bullish," "bearish," or "neutral." According to our system, three of the Magnificent Seven stocks have weak strength and timing indicators. The lesson here is simple... It's easy to get blinded by high returns when it happens in one corner of the market. That creates an urge to jump on the bandwagon – especially when it involves the seven biggest stocks in the market. But as investors, we should take a more nuanced view. You don't have to just jump in the basket and hope for the best. That's not to say the Magnificent Seven stocks are bad investments... But simply riding them in hopes of making consistent, long-term returns is a one-basket approach. Don't make that mistake today. Good investing, Vic Lederman
Editor's note: Chaikin Analytics founder Marc Chaikin recommended Nvidia before it soared 32,000%. But right now, he says that's an "old story"... The S&P 500 has made nearly 50 new record highs this year alone. And Marc sees a lot of investors acting foolishly with their money. But a market shift is coming – and it's creating what he calls the "greatest rapid-fire moneymaking opportunity" of his 50-year career. That's why Marc is going on camera to share all the details on Tuesday, October 29, at 10 a.m. Eastern time. Learn how to watch his big reveal for free by clicking here.
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