FREE NEWSLETTER
Go to main Forum page »
I’m planning to rebalance at year-end, and I’m going to do something index purists might consider heresy: deliberately tilt away from the market’s weighting.
Lately, I’ve become increasingly uncomfortable with the portion of my portfolio devoted to the Magnificent Seven tech stocks, currently pushing towards 25%.
The index purist view would say that cap-weighted indices by definition represent the market’s collective wisdom about valuations. When the Magnificent Seven grows to nearly 25% of my developed world tracker, that’s the market telling me those companies have genuinely earned that weight through their size and success. Overriding this means I’m asserting that I’m a smart ass who knows better than Mr. Market.
Counter-intuitively, I really don’t think I know better. But having a quarter of my portfolio in seven companies—or really, one sector—does create vulnerability, regardless of how the market currently values them. This violates diversification principles that exist independently of index investing. And while markets are generally efficient, they’re not perfectly so. Momentum can create temporary distortions. The late 1990s tech bubble is the obvious historical parallel.
Neither choice is objectively “wrong.” The index purist approach has strong theoretical backing, but absolute adherence to it can sometimes conflict with prudent personal risk management for individual investors. Quite simply, I know my financial situation and don’t need the excess returns. I’m comfortable trading potential yield for greater diversification.
Although I’m being a “bad” indexer, I’m not abandoning the game. I’m simply going to allocate some of my capital to indices tracking the European and Asian markets and an overweight allocation to the UK market, bringing my “big seven” exposure down to 15%—a level I’m personally comfortable with.
This shift doesn’t have tax implications. These holdings are housed in tax-sheltered accounts, I can sell my winners and reallocate without triggering a capital gains bill. This allows me to focus purely on the math of risk and the psychology of sleep, rather than the hassle of taxes.
Am I going to give up some gains? Possibly. Am I going to underperform the index? Probably. Do I care? Not in the slightest. I’m past the stage where I need to squeeze every last basis point from my portfolio. What I need is resilience, not heroic returns. A good night’s sleep and the peace of mind that comes from genuine diversification—not having a quarter of my equity wealth tethered to seven companies in one sector—is worth far more to me than the possibility of outperformance.
In the end, I’d rather sleep soundly with 15% exposure than lose sleep worrying over 25%. Some might call this bad practice—I see it differently. It’s not about being a bad investor; it’s about knowing myself and what I’m actually investing for. So what do you think: am I being a “bad indexer,” or am I following a reasonable path of being a good “investor” because indexing and investing are definitely two separate philosophical propositions.
I understand your philosophy. I have had a world value and small cap tilt (all index funds or etf’s) in my stock portfolio for about 15 years. I purchase fixed income with my dividends. Do I own the S&P 500 and the Mag 7? Yes, can’t hide the trillions of dollars in market value. An interesting exercise is to use the Morningstar X-Ray analysis and see what you have in your aggregate portfolio of investments. As I age, my stock tilt may stay the same, but my mix of equity to fixed income will become more conservative.
I don’t understand why tilting your risk portfolio away from the index you are tracking is building resilience? What policies, in your investment policy document, are being violated by the Mag 7? That might help you understand your emotions better.
FWIW, this is an old topic. See what Ken Fisher had to say two years back.
The same Ken Fisher who has been filling my mailbox with fireplace kindling for decades?
I’ve read some of his work and he definitely comes across as a perma-bull. While I think he’s sharp, he isn’t really my taste; I prefer a bit more balance in the content I consume. I’d rather weigh things up for myself than have information filtered through the lens of someone who is perhaps a bit too enamored with their own opinion and brilliance.
The same person 🙂 He, despite his annoying marketing strategies, writes well. 🙂
Perhaps, but for me, it would be hard to imagine a commentator less credible than one who has to find clients by bombarding the uninterested with direct mail.
I only receive about one mailer per year from him. Guess he views me as a “pofolk.” I do see his tv ads at least once a week.
I reread his book “How To Smell A Rat” recently due to a related story that hit the news this past summer.
Seems to me that if he was performing a great service for his clients he would just rely on referrals from satisfied clients telling their friends, not mass mailings.
My view exactly.
To me, it’s quite simple. I’m retired now; I’ve “won the game.” I no longer need high yields tied to a handful of tech stocks—assets that suited my risk profile when I was building equity but are now redundant. I’m perfectly content scaling that exposure back to a still-significant 15% concentration. Ultimately, an investment policy must evolve with your life stages: what works for a 30-year-old accumulator is rarely right for a 60-year-old decumulator.
That makes sense. Not playing the game when you’ve already met your goals is the right approach.
Many sadly deviate from the investment approach (I am a Boglehead, but…) as they see the indexes churn through this bull market.
Resist the FOMO and stick to your plan is probably the best advice after spending less than you earn 😉
“In the end, I’d rather sleep soundly…”
I have always felt that THAT is the truest test of whether a portfolio is right for an investor.
How do you know you are not just listening to noise or maybe leaning on emotions?
I did something similar when I rebalanced in October (when I took my RMD). I moved some money out of Vanguard’s S&P 500 fund into Extended Market and International, and got my stock percentage back to 50%.
A sincere thanks for this post, Mark. There are some pretty smart people suggesting that 2026 may be the year for the other 493 stocks in the S&P 500 to make some noise. Also, a non-US index has been a wise play for most of this year, and that should continue. So I don’t think you are a bad indexer at all.
I had two retired clients, both engineers, who were always in the right sectors at the right times. I don’t know how they did it; maybe something to do with their analytical engineer brains or spreadsheets.
I can certainly attest to non-US performance lately. My standout winner over the last 12 months has actually been a UK high-dividend yield tracker. It’s outperformed every other asset in my portfolio… more’s the pity I only gave it a small allocation.
I have had similar thoughts about concentration risk for most of this year. I ended up trimming some of my high-flyers and increasing stable-value investments in the form of money market and ultra-short term bond funds, all within IRAs to avoid tax consequences.
I did look at international investments, which are having a very good year, but decided they did not offer enough trade-off between potentially reducing risk and sufficient long-term performance when compared with domestic U.S. investments.
I really appreciate this article. It is exactly where I find us financially at our stage of life. We are and always have been 100% invested in stock index funds. We don’t need to pursue growth but i always think that bonds are a break even no growth investment after inflation eats the gains. I hold no bond or foreign ETF’s. I am considering going 100% Vanguard Total World VT
“but i always think that bonds are a break even no growth investment after inflation eats the gains.”
To avoid this scenario you can invest in TIPS.
Total World will definitely decrease your portfolio concentration with regards to the “Magnificent Seven,” as opposed to an S&P 500 tracker. You will also capture any international outperformance, although I think your concentration will still be in the region of 20%—which, to my mind, is a much more comfortable number.
20% is exactly correct, Mark, which for me says that if an investor is looking to truly get away from the Mag Seven, VT ain’t the way to do it.
I would agree. Although I guess it’s an improvement over a S&P500 tracker.
The Vanguard Capital Market forecast supports your shift: they predict higher growth in non-US developed markets than US equities.
https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-return-forecasts.html
Very interesting model predictions: no risk premium for equity investors when the expected return for US stocks is about 3.5% – 5.5% with 15% volatility while the expected return for US long term treasuries is about 4.8% – 5.8% with 10.4% volatility – both for the 10 year horizon. To outperform the long term treasuries, investors need to accept volatility 18-19% in global market, ex-US market or US value / small stock indexes.
Hey Mark,
Your post peaked my interest on my MAG 7 holdings. I have mostly broad index funds with the only “specialty” ETF is a small percentage in Vanguard Dividend Appreciation.
Per Morningstar’s Portfolio Manager feature only 7.5% is in this genre. I’m not sure if this percentage is of my equity holdings or my total portfolio but at the most it would be just under 15% of my equity holdings as my allocation is 45/45/10.
Of interest my largest stockholding is Apple at 1.74%, and Tesla is only my 12th largest holding at 0.39%. I only have five holdings that are greater than 1%. So even if Apple went totally bankrupt it would have less of an effect on my portfolio than a generic bad day on Wall Street.
I sleep well.
David, I should have been more specific with my terminology. The exact figure of 23.6% wasn’t referring to my total portfolio—it’s the percentage that the Magnificent Seven make up within my Vanguard Developed World Global Tracker itself. Interestingly, a typical S&P 500 tracker will have an allocation in the 30% range
This past weekend “Downtown” Josh Brown of Ritholtz Wealth Management posted a detailed argument to the effect that concentration is not a problem.
Even so, reallocating a portion of your portfolio for your stated reasons, especially peace of mind and diversification, makes sense.
I have considered reducing my exposure to VTI, the total stock market index, for this reason but have not yet done so. Call it complacency or inertia. I have been hearing this concern for a long time. If I had acted when I first heard it, I would have foregone a lot of profits.
IMO, this is very different from the dotcom debacle. The seven are all real companies with real products, growth and profitability, unlike the dotcom era.
I see Circular AI financing in the current market. It is similar to the dot.com. The company I worked for at the time was one of the players doing the financing. I don’t own all 7 stocks but I am aware of the need to reduce my stocks allocations.
I’ve also heard the commentary about concentration risk over the past few years and disregarded the noise. My reason for acting now is personal—I don’t need the yield, and 25% feels too high for my comfort. Pulling back to 15% brings my concentration to a level I’m comfortable with.
I was using the dot-com bubble as an example of momentum dynamics, not suggesting the situations are similar. I recently posted an article that highlights the differences between the two.
Mark, not necessarily a bad plan for a retiree. I also contemplated something similar but ended up simply reducing my allocation to equities (by 10%) until the age I start Social Security in 3 years. I simply reduced exposure differently. I also was able to make this tweak within a tax sheltered account so no capital gain issue.
We did the same. Chris
Interesting that I watched a Jack Bogle Q&A session (a week after we adjusted our allocation) from 2018 where he talked about doing an adjustment to his AA in his personal portfolio by about 10% due to his thoughts of the market being overvalued at the time. He thought the markets would correct at some point, but said it could take up to around 5 years (it did 4 years later). He advocated for folks to perhaps tweak an AA based on one’s personal situation, but never to entirely exit the market which would be very foolish.
I like your approach, Mark. Something is always on sale in the financial markets. I have been buying value stocks for years for the same reasons you mention, and it has paid off handsomely and I get dividends which I reinvest. Long-term thinking and flexibility separates investors from traders.