The Information Technology sector has been on a roll so far in 2017. The returns for the sector year-to-date are nothing short of eye-opening: as of May 30, Information Technology has returned just over 20%, which puts it fairly far ahead of the next best performer, Consumer Discretionary (+11.52%). By comparison, the broad S&P 500 index is up a much lesser +7.7%, which while strong is still pretty modest compared to technology’s run.1
This strong performance has some investors scrambling to beef-up their investment portfolio’s technology holdings, in an effort to ‘join the party’ so to speak. But investors should take pause before rushing to buy more technology stocks. Doing so would essentially mean “chasing heat,” which is just another version of market timing– a tactic that is not necessarily advisable for the long-term investor.
Diversification Helps You Gain Exposure to Market Trends
If the equity portion of your investment portfolio is diversified, then you should already have some exposure to the well-performing technology sector – meaning that a percentage of your portfolio should have participated in some of the gains so far, in a risk-managed way. Broad diversification can ensure that when some areas of the market are doing well, you can participate in the upside. On the flip side, when areas of the market are underperforming you are not overly invested those areas, and as a result won’t feel the pinch of the downside as much. It’s a balancing act.
The idea of allocating more of your assets to technology means making the assumption that technology will continue this strong run. It may happen that way, but also it may not! What if you shift assets to technology just as its peaking? The question for the investor ultimately is: do you want to throw off your long-term plan to make a wager that technology will continue outperforming? It’s a risky endeavor that may not be worth it – chasing heat rarely is.
Leadership Changes Hands…Often
One factor to consider is that leadership in the market often changes hands. Take a close look at the graphic below. As you can see, there is rarely a time when a category remains a leader for a long stretch of time. Taking a look at 2015 – 2016, for example, if you were frustrated by weak returns in your Small-Cap and Emerging Markets holdings, and decided to sell, you would have missed out on nice rebounds for both categories in 2016 and 2017 year-to-date.
You’ll also notice that the white “Asset Alloc.” box, which can be thought of as the diversified portfolio, stays consistently in the middle of the pack – not too hot, not too cold. And it stays in the middle in a risk-managed way, with the investor not committing too many of his/her assets to a particular category. It’s the long-term investors’ approach.
Chasing Heat Can Lead to Suboptimal Return
No one can know for sure whether technology will continue this strong run, or whether another sector will end up surging from here. Analysts and experts can make estimates based on a ton of data crunching, but at the end of the day there is no guarantee of being right. Investors that constantly shift strategies as they “chase heat” are vulnerable to investing in a sector or region that has already delivered its strong results, and may falter from there. It’s better, in our view, to maintain a diversified approach throughout, so an investor can participate in the good returns and mitigate the bad ones. Remember: It’s a balancing act.
If your portfolio is missing technology exposure because it is not properly diversified, you're invited to have one of our Wealth Managers take a look and offer you some personalized suggestions. We will do so free of charge, in just a few minutes of your time. Get in touch with us today by calling 1-800-541-7774 or by starting a conversation over email at wealth@wrapmanager.com.
Source: CNBC
