April 19 featured one of the most drastic tech-led sell-offs we've seen in a while, with Nvidia (NVDA +2.59%) falling 10% in a single session. All of the "Magnificent Seven" stocks got hit hard on Friday and led the Nasdaq Composite to fall 5.5% in a week.
The Magnificent Seven is a term coined by Bank of America analyst Michael Hartnett and includes Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla.
Here are three moves you can make to brace for a prolonged market sell-off.
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1. Double-check your exposure
One of the most common mistakes investors make is to overly align themselves with a certain theme, sector, or type of stock.
The easiest way for this to happen is that similar stocks go up more than the rest of your portfolio and then make up a larger percentage. This is exactly what has happened in the S&P 500, which is now comprised of 29.7% tech stocks.
If you have held outperforming growth stocks for some time, your portfolio might have a higher allocation to growth than a few years ago.
Another important factor to check is your exposure to stocks in exchange-traded funds and index funds. Every $100 invested in the S&P 500 is really about $30 in tech and $70 in the rest of the market. Out of every $100 invested in the Nasdaq Composite, over $40 goes into the Magnificent Seven.
Many companies are also correlated to Magnificent Seven stocks. For example, if Nvidia gets hit hard, other chip stocks will also go down (precisely what played out during the April 19 sell-off).
Understanding how your portfolio will likely perform in different situations can help you better manage your holdings and adjust your allocation with your investment objectives.
NASDAQ: NVDA
Key Data Points
2. Revisit investment theses
When volatility spikes, it's easy to get more emotional about investing. One way to counter emotions, on both the upside and the downside, is to have a clearly defined investment thesis for each stock you own.
It's easier to let a winner run or have the patience to hold a stock when it sells off if you have clear expectations for a company. For example, a good reason for owning Microsoft is because of its rock-solid balance sheet, massive free cash flow generation, steadily growing dividend and buyback program, diversified business model, growing margins and sales, and its ability to invest in artificial intelligence (AI), cloud infrastructure, and other growth outlets without jeopardizing the strength of the business.
In this vein, owning Microsoft isn't just about what it does in the coming quarter or year, but how it is positioned to capitalize on megatrends and return value to shareholders. Of course, investors want to make sure the valuation doesn't get out of hand, but it would take a seismic blunder for Microsoft's investment thesis to derail.
The most volatile Magnificent Seven stock is probably Nvidia, which collapsed 10% on April 19 and fell nearly 13.9% last week.
The harsh reality is that if a move like that scares you, it might be best not to own Nvidia at all -- which is perfectly OK.
Growth stocks like Nvidia aren't for everyone, and it takes a specific kind of risk tolerance to own them outright. For many investors, it might be better to get exposure to a company like Nvidia through an inexpensive fund like the Vanguard Growth ETF, where Nvidia is a top holding but is part of a diversified set of growth-focused stocks.
3. Regularly contribute to your portfolio
Investors who regularly commit new savings to their portfolios could see the sell-off as a buying opportunity, especially now that valuations have become more attractive.
It's never a good feeling to have no inflows in your portfolio and be 100% invested in stocks so that you have to sell or reduce a position to buy something else.
Contributing cash regularly to a portfolio, even a tiny amount, provides the dry powder needed to put capital to work during a sell-off without selling a stock at a big loss.
The path forward
Your approach to the sell-off in Magnificent Seven stocks will depend on your specific situation and portfolio needs. For example, if you go through a portfolio check and find out you already have plenty of exposure to the theme, you might want to do nothing.
If you find out you own a stock for the wrong reasons after revisiting an investment thesis, you might want to consider what changes need to be made to get your portfolio back on track. If you are looking for more exposure to growth, you could allocate a higher percentage of new portfolio contributions to your favorite Magnificent Seven companies. Or you could instead consider ETFs that are concentrated in growth stocks.
Most importantly, if you are a young investor or have a long time horizon, you will likely be a net buyer of stocks in the future, not a seller. In this position, sell-offs can actually work to your advantage.
Understanding that long-term financial goals are far more important than how green or red your portfolio looks on a given day can help calm emotions and help you make grounded investment decisions, especially when there's a lot of noise in the market.
