Advertisement

Move slowly and carefully away from the tech giants

If you hold a lot of tech stocks in your portfolio, you should think very seriously about diversifying away from them, says Merryn Somerset Webb.

There's a sad story in The Times this week of the fate of the sailors on the Dutch East India Company ship, Rooswijk. It sank off the coast of Kent in 1740, and its recent excavation has uncovered a haul of rather lovely silver coins. The not-so-lovely bit is that the coins were sewn into the clothes of many of the 237 sailors who went down with the ship something that wouldn't exactly have helped them save themselves from their watery graves.

Advertisement - Article continues below

I thought of this again when the Nasdaq hit yet another record high on Tuesday as Alphabet (owner of Google) beat earnings forecasts again. Apple, Amazon and Alphabet are now the three most valuable stocks listed in the US. You can argue that they should be: Google's advertising revenues are up 24%, and the company is making so much money that even after the stunning $5.1bn charge to cover last week's fine from the European Union for anti-competitive behaviour, it has still cleared $3.2bn in profit. Not bad going.

Advertisement
Advertisement - Article continues below

But we should still, I think, approach the tech sector with some caution. The last great tech boom (1999) wasn't the same as this one (more actual profits this time), but the main lesson learnt from it that a market led for too long by just one sector is a dangerous market is as valid now as it was then. Remember how in 2000 everyone suddenly dumped what fund manager Premier's Simon Evan-Cook calls their "overpriced tech fantasies" and started buying "unassuming, reasonably valued stocks" instead? That will happen again.

Advertisement - Article continues below

When? On the face of it, the flattening of the yield curve alongside ongoing quantitative tightening (QT) in the US suggest it will be soon. As MacroStrategy's James Ferguson notes, QT has created a clear pattern in the S&P 500: every month since February it has done well, then from mid-month onwards (when the Fed sells bonds or allows them to mature so as to shrink its balance sheet that's QT) the gains have been "repeatedly reined in".

There are counter forces that could easily delay any market correction (again). US elections are coming up (Trump won't want to see the market fall ahead of those, and is already agitating against Fed tightening), while lower growth and trade tensions might soon push China back from tightening to easing again. Both of these factors could put one final bit of nitroglycerine under the momentum part of the market.

Yet that should, perhaps, be seen not as a chance to buy more big tech, but to adjust your portfolio away from it. This doesn't mean going too mad for cash (the rise in public-sector salaries this week should be a reminder that inflation is far from dead). But it does mean diversifying into value where you can. Think of value as the lifeboat that will stop your FANGs from sinking you and your portfolio to the bottom of the sea.

Advertisement
Advertisement

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
The tech stock bubble continues – but wise investors should look for value elsewhere
Investment strategy

The tech stock bubble continues – but wise investors should look for value elsewhere

As tech stocks continue to soar, real value has been forgotten. It’s fine to hold tech, says Merryn Somerset Webb, but investors should look for value…
9 Sep 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
7 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020

Most Popular

Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020