This is an interesting article on the dominance of techs in the market.
The recent robust growth of tech stocks have made many portfolios heavily weighted in tech. This presents a conundrum. You must own tech for high performance when most of the growth is in tech, but if the market for tech turns down, you also must deal with the ugly downside of the high flying sector. Tech recently got hit with bad news on Facebook, Amazon and Telsa. Everything in life comes with both positives and negatives. There is no "free lunch"!
Since passive funds are focused on matching an index, they must hold whatever tech is in the index, no matter how high priced the tech stocks are. The question that still has to be answered is will passive investors still stay with their passive funds when the market turns south. As fast as one sector bumps up the index, that section can bump it down. The market can be just like a bi-polar person where the high highs are followed by the low lows.
Whereas, mutual funds used to be held for long periods of time, mutual fund investors are holding funds for shorter and shorter periods of time. Will investors stand their ground when the “wind blows” the other direction?
My portfolio's tech exposure has grown quite a bit in the last 2 years, so I am keenly aware of these risks. The two best ways I know about how to reasonably protect for the eventual downside are to have a margin of safety and strong fundamentals in the companies owned.
The margin of safety is achieved by owning securities at low enough prices relative to their market prices.
Strong fundamentals is having 5 to 10 years of relatively good financial performance. This performance is referring, not to market financial performance, but to fundamentals in their P&L, balance sheet and cash flows.
It is wise to know your exposure to potential risks and have some protection for those risks.
Have you evaluated your risks?!
