Tech stocks have seen a significant rebound, but investors should not forget the importance of diversification. Over-concentration in tech stocks can lead to a lack of diversification, making it essential to spread investments across various asset classes.
Historically, stocks have outperformed other asset classes, but future returns are uncertain, and diversification can help mitigate risk. Investors don’t often get a second chance to correct their investment decisions. The “magnificent seven” tech giants, including Apple, Microsoft, and Amazon, have been on a hot streak, catching investors’ attention.
However, this concentration of stocks in a relative handful of companies sharing similar characteristics poses significant risks. To avoid these risks, mainstream investors should recognize the importance of diversification. Mark Matson, head of Scottsdale investment firm Matson Money, advises against overweighting just these seven stocks and instead suggests adding small companies, foreign stocks, and other types to the mix.
Even if you hold a stock fund that tracks a broad grouping like the Standard & Poor’s 500 index, you may not be properly diversified. The S&P 500 is so tech-heavy that it’s trading in close lockstep with the Nasdaq 100, a traditional tech-dominated index. In reality, owning at least a couple dozen different stocks is necessary to achieve minimal diversification.
To ensure a smoother ride and downside protection, you should also include different types of assets such as bonds, cash, REITS, gold, and funds that hold commodities. On the stock side, foreign stocks or funds pegged to developed economies can further diversify your portfolio.
While large stocks have outperformed both bonds and cash in the long haul, their performance is uncertain ahead. Researchers forecast lower returns for stocks over the next decade, which might prompt investors to consider adding more diversification to their portfolios. By doing so, you can mitigate potential losses and ensure a more balanced investment strategy.
Source: https://eu.azcentral.com/story/money/business/2025/02/09/how-to-avoid-over-relying-on-tech-stocks/78208045007