You don’t have to be the next Steve Jobs to understand the power technology has in the market. In today’s post, we’ll show you what to keep in mind during exciting tech rallies that history shows are not sustainable.
At the end of 2019, the 10 largest stocks in the S&P 500 had a combined market capitalization weight of over 20 percent. A capitalization-weighted index assigns companies a certain percentage according to their market cap, or the number of shares outstanding multiplied by the share price. Therefore, a larger market cap means a larger weight in the index.
Which Tech Companies Are On Top?
Facebook, Apple, Amazon, Netflix, and Google, to name a few. This list may not be surprising,since the FAANG stocks are among the most popular. And the dominance of large companies in the market is a longstanding phenomenon. From the 1930s to 1980s, companies such as AT&T, General Electric, and Exxon ruled the stock market due to their industrial innovations. The difference today is that we have switched out telephones for iPhones and light bulbs for streaming services.
No matter how attractive the top 10 stocks seem, time is not always on their side. In the past, those on top underperformed the market after five and ten years. Rather than investing in these stocks individually, you may want to create a diversified strategy that allows you to withstand the ebb and flow of the tech space. Here’s how.
1. Diversify your portfolio.
Invest in different asset classes across several industries. Depending on your specific financial goals, you may want to lean toward more risk-tolerant or risk-averse investments, and your financial planner can help you evaluate your risk tolerance and guide you to the path that’s best for you. Either way, a wide net of investments can help to balance out the positive and negative performance of individual investments, reducing acute risk.
2. Consider passive investing.
Active investing requires investors to buy and sell stocks to outperform the market. A passive strategy allows you to match the market’s performance by investing in mutual funds, ETFs, and other instruments that seek to match the performance of the overall market.
3. Take emotion out of the equation.
We are often attracted to companies whose products we use in our everyday lives, and are captivated by the excitement of technological innovation. However, personal bias is not always an indicator of future success. A diverse, broad investment plan, informed by the market and a financial advisor, can help you to make sound decisions, free from sunk-cost and familiarity bias.
4. Talk to a financial advisor.
The right financial advisor can help you see past the headlines and create a plan that navigates your financial goals through changing times. Find an advisor whose values align with yours and with whom you can establish a long-term relationship.
Want to learn more ways to improve your investing habits? Read our blog post on six behavioral traits that can influence your investment decisions.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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