If you’re like most folks, I bet you’ve loaded up on tech stocks…
After all, they’ve shined since the dark days of the COVID-19 bear market.
The tech-heavy Nasdaq Composite Index gained 21% last year. And it was up 44% in 2020.
Keep in mind that the index also plunged 30% in March 2020. So it surged a downright silly 88% from the bottom through the end of that year.
After massive gains like that, a lot of people are “overweight” the tech sector today. They own more of these stocks than they should.
That’s causing a lot of pain and sleepless nights for these folks…
You see, investors can’t seem to run away from the sector any faster right now. Because of that, the Nasdaq just entered correction territory for the first time in nearly two years.
Fortunately, if your tech holdings are keeping you up at night, I have a fix for you today. And it’s simpler than you might think…
The fix is an investing fundamental known as diversification.
Diversification is the idea that you don’t want to own too much of one thing. This is true for individual stocks. And it’s also true for market sectors, like technology and industrials.
If you’re holding too many tech stocks today, you have two options…
The first option is the more obvious one. I call it “diversification by sale.” It’s what most people do when they want to diversify their assets.
The idea is as simple as it sounds…
First, sell your shares in the stock or sector to which you’re overexposed.
Then, use the proceeds to go buy something else. And most importantly, make sure the “something else” you buy is different from what you’re selling.
For example, if you’re overloaded on tech stocks today, don’t sell Facebook owner Meta Platforms (FB) only to turn around and buy social media giant Twitter (TWTR). You want to balance the risk in your portfolio by buying something different – like energy stocks.
The second diversification option is what I call “dilution.” With this approach, you skip the selling part and just buy something new to offset your overweight position.
Of course, this strategy requires two things that many folks don’t have – time and money. That’s why most investors choose the first option.
The specifics of diversification depend on your individual situation and investment goals. But in general, you should limit your exposure in any single sector to 20% or less.
Under that guideline, a 25% loss in that sector would equal a 5% loss for your overall portfolio. And if you’ve diversified your assets, any gains across the rest of your holdings could offset that loss.
By properly diversifying, I’ve slept easily at night despite tech stocks selling off to start 2022. I hope following this fundamental investment strategy will help you do the same.
Good investing,
Karina Kovalcik
