Risk Management in 2026

chiang_mai

It's a significant concern to me that the Mag 7 occupies the top 40% of the L&G US Index Trust, the main fund that I, and many others use, for US investment. If the AI program stays on the same trajectory, that will result in substantial gains to the fund. But it also means that any failure by the Mag 7 or the Tech sector will generate significant losses. My personal view is that risk is too great, not to be mitigated to some degree. Of all the options I can see, the only sensible way forward is to dilute the concentration of the Mag 7 in the fund.

Moving to an equal weight US Index tracker is not productive and I have yet to find a US managed fund that is sufficently attractive.  Moving to a global fund with a high allocation to the US is a possibility but on balance, deploying a global tracker may be the better option. The question is, how much dilution is sensible, compared to the increased markets exposure.

The options range from the Global 100, which has 59% concentration and the FTSE Global All Cap at 21%. A more sensible choice might be the FTSE All World which has 25% concentration, which is half of what I currently hold. Deploying the HSBC FTSE All World fund would allow me to reduce the Mag 7 concentration by 50% whilst improving global exposure by adding 3,700 companies. That move will reduce the upside potential but also the downside (which is the objective), along with reduced volatility and single market dependency.  

Alexland

chiang_mai said:

It's a significant concern to me that the Mag 7 occupies the top 40% of the L&G US Index Trust...

I've pondered over equal weight indexes a few times over the years but prefer market cap and think its a lot simpler to just own a global tracker such as Developed World, All World, or All Cap. It gives a nice mix of growth and value and yes there's still a lot of US shares but many of them are just big international companies with global revenues. I'd rather manage risk by diversifying into index linked bonds than create bespoke equities configurations.

chiang_mai

Alexland said:

chiang_mai said:

It's a significant concern to me that the Mag 7 occupies the top 40% of the L&G US Index Trust

I've pondered over equal weight indexes a few times over the years but prefer market cap and think its a lot simpler to just own a global tracker such as Developed world, All World, or All Cap. It gives a nice mix of growth and value and yes there's still a lot of US shares but many of them are just big international companies with global revenues. I'd rather manage risk by diversifying into other asset class(es) than create bespoke equities configurations.

I went back and forth between HSBC FTSE All World and Vanguard's Global All Caps. I think that VG's 7,000 company fund is probably too much when it only reduces concentration from 25% to 22%, over the All World option. The other reason is that I'm very comfortable with my EM allocations at present and adding another EM layer to that is not something I want. Either solution is far better than what I have presently, although others may have different needs in this respect. Equal weight index looks like far too much trouble and whilst it would reduce risk substantially, it generates a new risk of not being able to realise a decent return. 

Uriziel

chiang_mai said:

It's a significant concern to me that the Mag 7 occupies the top 40% of the L&G US Index Trust, the main fund that I, and many others use, for US investment. If the AI program stays on the same trajectory, that will result in substantial gains to the fund. But it also means that any failure by the Mag 7 or the Tech sector will generate significant losses. My personal view is that risk is too great, not to be mitigated to some degree. Of all the options I can see, the only sensible way forward is to dilute the concentration of the Mag 7 in the fund.

Moving to an equal weight US Index tracker is not productive and I have yet to find a US managed fund that is sufficently attractive.  Moving to a global fund with a high allocation to the US is a possibility but on balance, deploying a global tracker may be the better option. The question is, how much dilution is sensible, compared to the increased markets exposure.

The options range from the Global 100, which has 59% concentration and the FTSE Global All Cap at 21%. A more sensible choice might be the FTSE All World which has 25% concentration, which is half of what I currently hold. Deploying the HSBC FTSE All World fund would allow me to reduce the Mag 7 concentration by 50% whilst improving global exposure by adding 3,700 companies. That move will reduce the upside potential but also the downside (which is the objective), along with reduced volatility and single market dependency.  

If you take away the tech and AI growth the S&P 500 did not grow in 2025 so if you would have reduced their concentration you would have ended up with no growth for the whole year and might continue doing so. There is no point investing in anything American if you are not going to invest in the AI and tech companies.

chiang_mai

Uriziel said:

chiang_mai said:

It's a significant concern to me that the Mag 7 occupies the top 40% of the L&G US Index Trust, the main fund that I, and many others use, for US investment. If the AI program stays on the same trajectory, that will result in substantial gains to the fund. But it also means that any failure by the Mag 7 or the Tech sector will generate significant losses. My personal view is that risk is too great, not to be mitigated to some degree. Of all the options I can see, the only sensible way forward is to dilute the concentration of the Mag 7 in the fund.

Moving to an equal weight US Index tracker is not productive and I have yet to find a US managed fund that is sufficently attractive.  Moving to a global fund with a high allocation to the US is a possibility but on balance, deploying a global tracker may be the better option. The question is, how much dilution is sensible, compared to the increased markets exposure.

The options range from the Global 100, which has 59% concentration and the FTSE Global All Cap at 21%. A more sensible choice might be the FTSE All World which has 25% concentration, which is half of what I currently hold. Deploying the HSBC FTSE All World fund would allow me to reduce the Mag 7 concentration by 50% whilst improving global exposure by adding 3,700 companies. That move will reduce the upside potential but also the downside (which is the objective), along with reduced volatility and single market dependency.  

If you take away the tech and AI growth the S&P 500 did not grow in 2025 so if you would have reduced their concentration you would have ended up with no growth for the whole year and might continue doing so. There is no point investing in anything American if you are not going to invest in the AI and tech companies.

Reducing the concentration doesn't mean eliminating it completely, the objective is to reduce it to an acceptable level of risk. Different investors will have different appetite for risk. At age 75 years, I'm not inclined to take on a high risk bet that could see Mag 7 or Tech fail and the index spend the next few years in recovery.

aroominyork

So you pays your money and you takes your choice. I like an approach which is mathematically neat and where, if things go wrong, I couldn't blame myself for taking silly punts. I hold a lot of corporate bonds (all in funds, mostly short duration) and for equities I am around 40% North America (OH would be happy with 0%), 30% UK/Europe, 30% EM/Japan/Developed AP, mostly index funds. I've always been underweight US so I'm hoping one of these days it pays off! A more sophisticated (small 's') approach might add REITs, infrastructure, commodities and gold, but I'm a simple soul.

Linton

Uriziel said:

chiang_mai said:

It's a significant concern to me that the Mag 7 occupies the top 40% of the L&G US Index Trust, the main fund that I, and many others use, for US investment. If the AI program stays on the same trajectory, that will result in substantial gains to the fund. But it also means that any failure by the Mag 7 or the Tech sector will generate significant losses. My personal view is that risk is too great, not to be mitigated to some degree. Of all the options I can see, the only sensible way forward is to dilute the concentration of the Mag 7 in the fund.

Moving to an equal weight US Index tracker is not productive and I have yet to find a US managed fund that is sufficently attractive.  Moving to a global fund with a high allocation to the US is a possibility but on balance, deploying a global tracker may be the better option. The question is, how much dilution is sensible, compared to the increased markets exposure.

The options range from the Global 100, which has 59% concentration and the FTSE Global All Cap at 21%. A more sensible choice might be the FTSE All World which has 25% concentration, which is half of what I currently hold. Deploying the HSBC FTSE All World fund would allow me to reduce the Mag 7 concentration by 50% whilst improving global exposure by adding 3,700 companies. That move will reduce the upside potential but also the downside (which is the objective), along with reduced volatility and single market dependency.  

If you take away the tech and AI growth the S&P 500 did not grow in 2025 so if you would have reduced their concentration you would have ended up with no growth for the whole year and might continue doing so. There is no point investing in anything American if you are not going to invest in the AI and tech companies.

Do you know what will happen in the US markets next year?  In my view diversification is far more important than last year's winners.

kempiejon

Some time back I looked at equal weighting and concluded it missed growth compared to cap weighted. Not a very scientific reckoning but only a passing interest.
I recently compared the 10 year history of a cap weighted global etf (VWRL) Vanguard global all world, to one with an income bent, VHYL, Vanguard all world high dividend yield. Over 1 and 5 years VHYL beats but 3 and 10 VWRL has it VHYL throws of ~2.5% income is only 40% USA and Mag7 not in the top 10.
Now, a yield bent will avoid growthy stocks so it is making an active market decision which isn't the attraction of tracking the market.

aroominyork

An equal weight ETF, eg for the S&P, has the theoretical advantage of selling high and buying low, but it's buying everything low; there is no smart beta-type filter. There seems too much risk of overweighting junk. 

m_c_s

Equal weight indices (major S&P and MSCI) have outperformed cap weighted by a significant margin over the last 40 to 50yrs; e.g. S&P 500:

The gap has closed a little in recent years mainly because of the mega-cap technology stocks. Looking at just the last 5 or 10 yr charts would clearly show cap weighted to have majorly outperformed. You will see a similar pattern between 1996 and 2000 on the graph and ofocurse we know what happened after that. Recency bias is everywhere when there are strong trends one way or another. Technology and mega caps may well continue this trend going forward though.