One of the classic rules of investment is to never put all of your eggs in one basket. The rationale behind this is that, if an investment fails, you don’t want to be in a position to lose most or all of your money.
However, from an investment perspective, it goes even deeper than that. You do not want to have a selection of baskets with the same types of eggs. I once met a lovely man who told me that he had a diversified portfolio as he had a wide selection of exactly the same kind of investments but with different companies. I think that the look of confusion on my face was an influence (I will never be a professional poker player) and he asked me to help him to diversify his investments. I have also met a client who said that he had three multi asset balanced funds as his entire investment portfolio. Good work I said. However, when I looked into it, it was the same fund with three different names via three different companies, including the original provider
Historically, using a wide index fund was the perfect way to diversify your investments.
The S&P 500 contains shares in the 500 largest companies in the USA. The MSCI world share index currently has 1,321 shares in it as of 14 November 2025. However, the indexes use a “weighting by capitalisation” system, where the percentage of a company owned by the index is relative to the size of the company.
You may have heard references to “the magnificent Seven”. These are the 7 largest companies on the US Share market and are all regarded as being predominantly technology type companies. The Magnificent 7 are Apple, Alphabet (Google), Microsoft, Amazon, Nvidia, Meta (Facebook) and Tesla.
If we lift the bonnet – over a third of your S&P 500 share fund is invested into the Magnificent Seven. Yes, believe it or not, 7 companies make up a third of the value of the 500 largest companies in the USA. If you own the MSCI world index, these 7 companies make up 20% of the worlds largest 1,321 companies! The Magnificent seven make up more of the MSCI world index than the shares of Japan, the United Kingdom, China and France combined!
Nvidia, the worlds largest company by market value, is worth more than the GDP of every country on earth with the exception of the USA and China!! It is just CRAZY to think that a single business is worth that much!
If we were to get a “tech bubble” and the technology stocks were to suddenly and rapidly decline, the average index fund is going to take a significant hit in value.
That is exactly why it is essential that investors understand what is under the hood!
Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
DISCLAIMER: The information contained in this article represents the views of the author. It is based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are given with an express disclaimer of responsibility and no right shall rise against any of the authors or Smart Money Advice or their employees either directly or indirectly out of any views, advice or information.