The retirement accounts of millions of Americans are packed with technology stocks such as Facebook, Amazon.com, and Apple. It’s been a winning bet, and one that violates a cardinal tenet of responsible investing—diversification.
Many popular U.S.-focused equity mutual funds in 401(k) plans have heavy tech weightings. Even investors in index funds likely have more riding on tech than they realize. More than 21 percent of the $410.4 billion Vanguard 500 Index Fund, which tracks the market capitalization-weighted S&P 500 index, is in tech stocks.
Nine years after the S&P 500 hit bottom at 677 on March 9, 2009, it stands at 2,728. The stock of Apple Inc., meanwhile, has raced from $11.87 to $176.67. So what’s the problem? “When there is a turnaround, there will be momentum on the other side, and the largest portions of index funds will go down farther than the market,” says Jeff Porter, chief investment officer of wealth adviser Sullivan Bruyette Speros & Blayney.
Tech dominates an actively managed mutual fund found in many 401(k) plans, the $129.6 billion Fidelity Contrafund. The fund had 35 percent in tech as of Jan. 31. Even so, Morningstar Inc. rates Contrafund’s risk as low next to its large-cap growth peers. In part that’s because of a big stake in Berkshire Hathaway Inc., which helps balance the tech exposure. Portfolio manager Will Danoff’s 28-year tenure running the fund helps as well. As of March 6, Contrafund had a 15-year total return of 12.8 percent, topping the 10.8 percent return of its large-cap growth peers and the S&P 500’s 10.6 percent for the same period.
increased volatility that may bring. Panic selling rarely turns out well.
To lessen exposure to tech stocks, Sullivan Bruyette’s Porter suggests taking some profits and moving money into value-oriented equity funds, which screen out expensive stocks. The value funds’ cheaper stocks—often in financials, materials, energy, and industrials—“tend to do better when interest rates rise, which is another risk out there,” he says.
For retirees and those age 55 and older, Porter suggests keeping the equivalent of at least eight years of annual income in cash or short-term bonds. If you can do that, “you can feel comfortable about the downturn and live off cash and bonds while you wait for the market to come back.”