Beyond the Magnificent Seven

A few weeks ago I wrote about how the typical Irish pension has quietly become a bet on seven American technology companies. The response told me I'd touched a nerve, and the most common follow-up was the fair one: "Right — so what should I own instead?"

That's the question worth answering. Spotting a problem is easy; fixing it sensibly, without lurching from one mistake into another, is the harder part. So let me set out what genuine diversification looks like — and what it doesn't.

First, what diversification is not

It is not selling your equities and hiding in cash. Cash feels safe, but over a thirty- or forty-year pension horizon it is one of the riskiest things you can do — inflation erodes it every single year, quietly and relentlessly. Reacting to concentration risk by fleeing the market altogether swaps one problem for a bigger one.

It is also not owning ten funds that all hold the same thing. I regularly review portfolios with five or six "different" funds that, under the bonnet, are all tracking the same global index — and therefore all leaning on the same handful of US mega-caps. That's the illusion of diversification, not the real thing.

Real diversification means spreading your money across investments that don't all rise and fall together. When one part of your portfolio is having a poor year, another part is holding up. You give up the thrill of betting everything on the winner — but you also avoid the disaster of betting everything on the loser.

The layers that actually matter

Think of a well-built pension as diversified across four dimensions.

Across geography. The standard global equity fund is roughly 70% invested in the United States, because it weights companies by size and America is home to the biggest. That's fine as a core holding — but leaving it there means Europe, the UK, Japan and the emerging markets are barely represented. Deliberately adding exposure to other regions reduces your dependence on any single economy, currency or government.

Across sectors. Technology has been the story of the last decade, and it dominates the index accordingly. A diversified fund makes room for the parts of the economy that get overlooked in a tech boom — healthcare, industrials, financials, consumer staples, energy, and yes, the European defence names that have re-rated sharply this year. These behave differently at different points in the cycle.

Across asset classes. For years, bonds paid almost nothing, so many people quietly abandoned them. That has changed. Government and quality corporate bonds now offer a real return again, and crucially they tend to behave differently from shares — providing ballast when equity markets wobble. A sensible allocation to bonds, and in some cases property or other real assets, is what turns a share portfolio into a genuine retirement plan.

Within your equities. Even inside the stock portion you have choices. A traditional index weights companies by size, so the biggest keep getting bigger in your portfolio. An equal-weighted approach, or a fund that deliberately caps how much any single company can represent, spreads the risk more evenly — reducing your Magnificent Seven exposure without abandoning the US market entirely.

Match the mix to your stage of life

Diversification isn't a fixed recipe — it should shift as you age. This is what pension people call a "glide path" or lifestyle strategy.

In your 30s and 40s, time is your greatest asset. You can afford to hold more in equities and ride out the volatility, because you have decades for the market to recover from any setback. Concentration matters less here, though it's still worth knowing what you own.

As you move through your 50s and into the run-up to retirement, the priority shifts from growth to protection. This is exactly when concentration risk becomes dangerous — a sharp fall five years before you retire can permanently damage your outcome, because you no longer have time to recover. This is the stage where de-risking and broadening out matters most.

Don't forget currency

Most Irish pensions are heavily exposed to the US dollar, simply because they hold so many US shares. If the dollar weakens against the euro, that costs you — even if the underlying shares perform well. It's rarely discussed, but currency is a real and often unmanaged risk. Some funds hedge it; many don't. It's worth knowing which camp yours is in.

The habit that holds it all together: rebalancing

Here's the part most people miss. Even a perfectly diversified portfolio drifts over time — the winners grow larger and quietly take over, and before long you're concentrated again without ever having chosen to be. Rebalancing simply means periodically trimming what has grown too large and topping up what has lagged. It's unglamorous, and it feels counter-intuitive — selling your winners — but it's one of the most reliable ways to keep risk under control, and over time it enforces the oldest discipline in investing: buy low, sell high.

Where to start

You don't need to overhaul everything overnight. Start by finding out what you actually own — the geographic split, the sector split, how much sits in the biggest few companies, and whether your risk level still suits your stage of life. From there, adjustments can usually be made inside your existing pension at little or no cost.

Diversification won't make you the most money in a runaway bull market — that's not its job. Its job is to make sure that no single event, in no single country, in no single sector, can derail the retirement you've spent decades building. In the months ahead, with markets priced for perfection, that's a job worth doing.

If you'd like an honest look at how diversified — or how concentrated — your own pension really is, I'm happy to review it, whether or not you're a client.