Should You Overweight Tech in Your Portfolio?

Should You Overweight Tech in Your Portfolio?

A couple of weeks ago, Apple “lost” $179 Billion in market cap in a single day. It has gone on to lose over $500 billion in market cap over the past few weeks. As I write this, Apple is valued at about $1.9 Trillion.

I have heard people asking the question, “Should I just own tech since that is so obviously the future?” At the very least, more people are talking about increasing their allocation to tech investments as if continued growth at this rate is a given.

The future is unknown, but I thought that adding some perspective to the current size of tech might be a valuable exercise.

I am going to use Apple as my primary example as it is currently the largest company by market cap, not only in the U.S. but globally.

At current, Apple (by itself) is worth close to, or more than, four entire individual sectors of the S&P 500. The four sectors are Energy, Materials, Real Estate, and Utilities as seen below.

Credit: Fidelity

To me, that is shocking. For a point of comparison, if you purchased those four respective sectors, you would own 26, 28, 31, or 28 companies as opposed to just one.

At current, just the loss to Apple’s market cap on that single day a couple of weeks ago ($179B) is worth more than 465 of S&P 500 companies. Even more amazingly, think of some of the huge names that are worth far less in total than just that one-day “loss” of market cap. Think of the history and size of the companies below and their total value by comparison:

  • Nike ($148B)
  • McDonald’s ($161B)
  • Costco ($158B)
  • Lowe’s ($128B)
  • Starbucks ($103B)
  • IBM ($114B)
  • Target ($75B)

Or how about this? The U.S. Tech Sector ($9.1T) is now larger than the entire EU stock Market ($8.9T)! Since the attached article was written, Tech has surpassed $11T!

These are mind boggling numbers.

A key question is, how much of the future performance is already priced in?

My point isn’t to make a call on what we should expect from the technology sector as these things can go on for a long time. It’s one significant reason I believe in the wisdom and simplicity of indexing because it doesn’t require you to make a bet one way or the other.

These observations are also not questioning whether these are great companies, because they surely are. I’m not someone who believes that this is tech bubble #2 as these companies are massively profitable which makes this quite a different scenario than the late 90s.

But, I just want to put it on the table that further concentrating portfolios into tech may not be a prudent decision. That said, whether you decide to take the leap and increase your concentration or diversify out, hindsight is either going to make you look like a genius or an idiot and that may be the hardest part of all.

The reason it’s often so hard to sell is that we see get to watch the rest of the movie. If tech continues to outpace the rest of the market, we feel dumb for not having stuck with it. Or alternatively, we may decide to go against sage advice and increase our portfolio concentration just before tech gets slammed.

Making any kind of market call is destined at some point to make you feel dumb. This is why investing is hard.

But being prudent is taking an objective look at the situation and making wise decisions. Perhaps it’s helpful to remember that the outcome isn’t always a great indicator of the quality of a decision.

Given the valuation of these companies, for me at least, it’s becoming harder to see the wisdom in being overweight these companies. And this is with me being on record as being quite optimistic with the future of technological advances. I continue to feel that way.

I am just trying to encourage you to take a second look if you are feeling the draw to join in on the tech party. When the media is holding segments of investing shows about why you should own more and more tech, it seems like a good time to get some perspective and revisit your portfolio allocation.

Stay the course,
Ashby


This post is not advice. Please see additional disclaimers.

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