The Magnificent 7 has rallied strongly since the 'Liberation Day' dip.
The US technology sector is now firmly back in favour.
Among the strongest rebounders has been Nvidia. In April, Nvidia plummeted to a 52 week low of $87. It has since recovered, and now sits at $142.
Investors may be considering whether to buy Magnificent 7 stocks, and if so how many.
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An underrepresented sector
By investing in US technology stocks, ASX investors gain exposure to a sector that's underrepresented in the local market.
The ASX is heavily concentrated among a small number of companies in selective industries. The financial sector is vastly overrepresented on the ASX, contributing around a quarter of the total S&P/ASX 200 Index (ASX: XJO). This is due to dominance of the 'big 4' retail banks as well as investment bank Macquarie Group (ASX: MQG).
For ASX investors, adding at least one Magnificent 7 stock to their portfolio is likely to improve diversification. But how many is too many?
Portfolio diversification
That's likely to depend on the context of each investors' individual portfolio.
Most experts recommend owning at least 20 stocks for diversification.
This mitigates risk by spreading investments across several asset classes, sectors, and geographies. Having 'too many eggs in one basket' can be disastrous for investors if they get it wrong. In some cases, it can take years to recover from a bad investment choice.
However, equally important to the number of stocks are the nature of the particular stocks selected. Specifically, how correlated they are with one another.
The Magnificent 7 all belong to the technology sector, so are reasonably correlated. However, perhaps not quite as closely correlated as you might think.
Each business in itself is reasonably well diversified, with a wide range of operating segments. For example, Alphabet derives revenue from Google Services, Google Cloud and other bets. Meanwhile, Amazon has three operating segments: North America, International, and Amazon Web Services (AWS). This provides some level of diversification within each business.
Position size
Perhaps the most important consideration is the position size of each investment. If you own 20 equally weighted stocks, then each investment is material. However, if your stocks are not equally weighted, it will depend on the size of each specific investment.
So, if you invest 0.5% of your funds in each magnificent 7 stock, you could buy all 7 and end up with the Magnificent 7 representing just 3.5% of your overall portfolio.
Foolish Takeaway
The Magnificent 7 companies have made a strong comeback since Liberation Day, with many retail investors jumping back in. If you're considering investing in one or more magnificent 7 stocks, don't forget to factor in what it will mean for your wider portfolio.
