Weekend Reading: Magnificent Concentration Edition

A reader wrote this week asking a timely question: many of us are in that stage of our financial lives where sequence-of-returns risk looms large, and it feels like our portfolios are increasingly at the mercy of a handful of tech giants.

The question was whether it’s possible to reduce or eliminate exposure to the “Magnificent Seven” stocks without abandoning the diversification benefits of broad-based ETFs.

Let’s start with what’s driving that concern. The combined market value of the Magnificent Seven (Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla) now tops $19 trillion, representing roughly 36% of the S&P 500’s $54 trillion market capitalization.

That’s more than double their 2022 weight and triple their share eight years ago. By late 2025, the top 10 stocks together made up close to 40% of the index, surpassing the dot-com era’s high-20 percent concentration and marking the most top-heavy market in modern history. Nvidia alone carries about an 8% weight in the index.

That kind of dominance shows up in ETF lineups. In a plain-vanilla S&P 500 tracker like VFV or VOO, those three largest names – Nvidia, Microsoft, and Apple – account for more than 21% of total holdings.

In a global all-equity fund such as VEQT or XEQT, the same three make up only about 7.5%, because exposure is spread across Canada, international developed markets, and emerging markets. That’s the beauty of global diversification: it naturally dilutes single-country and single-sector risk.

For investors who still want to take concentration down another notch, there are a few options:

Equal-weight ETFs like Invesco’s S&P 500 Equal Weight ETF (RSP) hold the same companies but give each one the same influence, rebalancing quarterly. This reduces single-stock risk but introduces higher turnover and can lag badly when mega-caps dominate, as they have in 2023-2025.

Ex-Mag 7 ETFs go a step further. Defiance’s Large Cap Ex-Mag 7 ETF (XMAG) simply removes those seven names. That’s a bold bet – it might protect you in a downturn, but you’ll underperform whenever the leaders keep leading.

There’s even direct indexing, a newer strategy that Wealthsimple now offers to retail investors. Instead of owning a fund, you hold dozens or hundreds of the individual stocks that make up an index. It allows for tax-loss harvesting, customization, and the ability to dial down exposure to specific companies (the most obvious being your own employer’s stock).

The trade-offs are higher costs, complexity, and the potential for tracking error if you exclude the wrong names.

Still, my boring default answer remains the same: own the world with a single global equity fund like VEQT or XEQT. You’ll still capture the winners, but no one company (or seven) is likely to make or break your portfolio.

And here’s the twist that often gets overlooked. Research by Hendrik Bessembinder shows that just 4% of stocks are responsible for all the net wealth creation in the stock market. Miss those winners and your long-term returns suffer far more than you gain by avoiding a few laggards.

Even if today’s valuations feel stretched, trying to outguess which companies will drive the next generation of returns is a fool’s errand.

So, the takeaway for this weekend: it’s fine to feel uneasy about the Magnificent Seven’s grip on the market, but diversification – not exclusion – is the antidote.

Spread your bets globally, keep costs low, and let the next batch of market leaders reveal themselves in time. For retirees and soon-to-be retirees, pair that with a cash wedge to help you facilitate regular withdrawals and avoid selling stocks in a downturn.

This Week’s Recap:

In the last edition of Weekend Reading I looked at points, planes, and permission to spend.

Next, I reviewed the new and fully updated classic, The Wealthy Barber and 81 of you entered to win a free copy of the book by leaving a comment about when you read the original and the impact it made on your life.

Mr. Chilton himself said he enjoyed reading all of the comments. Wow!

Congratulations to Wendy Ni le, who left a comment on November 5th at 8:09 a.m. I’ll contact you today and make arrangements to send you a free copy of The Wealthy Barber.

Promo of the Week:

Need a new iPhone, or a MacBook Air? What about both?

Wealthsimple’s latest promotion can score you one or both, depending on the amount of your deposit and/or transfer.

I know dozens (maybe hundreds) of you have taken advantage of these promotions in the past year or two, and while this one does not offer straight cash back, many of you covet this kind of promotion for the simple fact that these devices are not cheap.

If you’re in the market for a new iPhone 17 it’s starting at $1,129. And, depending on the MacBook you’re looking at paying at least $1,299.

• Open a Wealthsimple account (here, use my referral link and get an extra $25: http://wealthsimple.com/invite/FWWPDW), and;
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• Transfer or deposit $100,000+ into almost any account within 30 days

Remember, when transferring accounts from one institution to another I want you to keep in mind my Las Vegas analogy:

“What happens in your registered account stays in your registered account. You’re just moving across the street to a cheaper hotel with better amenities. You’re still in Vegas.”

This applies to all registered accounts (RRSP, RRIF, LIRA, LIF, TFSA, RESP, etc.).

Open an account at Wealthsimple, open the appropriate account type(s), initiate the transfer(s), and Wealthsimple’s back office contacts your existing bank’s back office to request the transfer. This is a federally regulated event and happens every day, and no break-up conversations need to be had at all.

Weekend Reading:

Investor memories of past performance are distorted, research finds. Preet Banerjee explains why that’s a problem.

Russell Sawatsky with a great piece on why index investors keep acting like stock pickers:

“The edge investors have been seeking has been there all along. It does not come from betting on narrow sectors but from embracing simplicity, discipline, and patience.”

More Canadians should consider delaying CPP and OAS to 70 in exchange for higher guaranteed, paid-for-life, inflation-protected benefits. But to many retirees the choice feels too much like a gamble with death. Retirement researcher Bonnie-Jeanne MacDonald developed a simple yet brilliant solution called a Pension Delay Guarantee. In plain language: If you delay and die early, the guarantee ensures you don’t lose out.

Markus Muhs’ chart of the month looks at the CAPE ratio, which is approaching its high during the dot com bubble, and what investors should do about it:

“The CAPE ratio doesn’t predict crashes; it simply reminds us that markets move in cycles. Lower your long term expectations for market growth, in particular for U.S. equities.”

I really enjoyed this article on the guilt of having money – when financial success feels uncomfortable.

To celebrate book launch day, Dave Chilton invited Preet Banerjee to host The Wealthy Barber podcast and interview Dave. Here’s his origin story:

A Wealth of Common Sense blogger Ben Carlson says stocks are not at dot-com nosebleed levels just yet but the past 10 years are right in line with Japan and the Roaring 20s.

Finally, enjoy this visual masterpiece (and excellent article) by Erica Alini on why the era of the shoebox condo is over and how Canada can build livable apartments to help solve the housing crisis.

Have a great weekend, everyone!