What I’d Buy Instead of Chasing the Magnificent 7

Remember when the Magnificent Seven stocks were actually magnificent? Neither do a lot of other beginner investors, some of whom may wonder why they’re still referred to as magnificent after their awful year-to-date performances. Undoubtedly, the group of seven previously outperforming stocks has tumbled off the podium, and it’s been painful for just about every investor, given the exposure that the average investor has to the names. Whether you’re an index investor, a stock picker, or a combination of the two, odds are you’re already invested in the names and their most recent downfall.

Just because they’re in a tough spot, though, does not mean they should be counted out of the game or that their magnificent descriptor ought to be changed. I’ve heard the lag seven and other clever variants, but at the end of the day, the latest pressure the previously heated names have been through is just par for the course.

Corrections and bear markets are potholes on the market road, and they’re not out of the ordinary. What’s most important, at least in my view, is how investors respond to the road bumps.

Being a hero with the Mag Seven sounds good on paper, provided you’ve got the chin

It’s a dangerous time to be an emotional investor, not because of the negative momentum behind stocks, but because of how much one stands to miss out on by selling after an already substantial drawdown. Indeed, you’ve got to be right two times when looking to get out before pain and getting in before the inevitable bounce. You not only need to time the exit well, but you’ve got to time the re-entry. Arguably, it’s really hard to be right once, let alone twice!

That’s why timing the exit might not be the best idea in the world, especially as a new investor who might think it’s so easy to get out while there’s selling pressure and get back in when things are looking up again. Sounds so simple, but in reality, it’s hard to pull off consistently. Instead of timing the hardest-hit names in the market, it might be more soothing to buy less choppy portfolio diversifiers with nice dividends at affordable prices, rather than chasing the Mag Seven lower.

Of course, I think the Mag Seven are starting to get quite undervalued as we exit the first quarter of the year. But they’re not going to be right for everyone, especially those who aren’t comfortable doubling down on dips and riding out bear markets. Not everybody was built to be a hero, after all! In any case, there are a slew of other names that are worth buying as well. And some of the plays have been far more resilient in this climate.

The VDY has been a remarkable performer

Think shares of Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY), a 3.6%-yielder that’s more weighted towards the larger-cap dividend payers on the TSX Index. Over the years, going big (when it comes to dividend yields and market caps) has proven to be quite the smart strategy.

The VDY is up more than 73% in the past five years, far better than the 58% gain posted by the S&P 500 or the 68% gain in the TSX Index. Add the 3.6% yield into the equation and the more recent relative outperformance, with a 6% gain year to date, and it’s clear that the VDY might be a way to do well if more chaotic action is in store for broader markets.

Unsurprisingly, there are quite a few banks, pipelines, and energy producers at the top, and these are all corners of the market far away from tech. Perhaps it’s no mystery as to why the dividend-heavy ETF is faring so well in an environment where risk-on is fading in favour of lower-multiple, higher-yielding stocks.

The post What I’d Buy Instead of Chasing the Magnificent 7 appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.