Anyone taking social media hashtags as the bellwether of the stock markets would have seen plenty of harbingers of doom in recent weeks. But as is often the case on these platforms, the consensus seems to be that these fears are overblown.  

It’s instructive to remember that a real “#stockmarketcrash” would entail a breathtaking drop over a matter of days that brings us suddenly into bear market territory (or worse). Given that a bear market is one where markets plummet 20% from a recent high, for the time being at least it would be more accurate to say we’ve been in “correction” territory.

There has undeniably been a sell-off in technology stocks in the past month which has hit funds and investment trusts majoring on this sector hard. It has also hurt the performance of the major indices, and thus the Exchange-Traded Funds based on them, due to technology names making up so much of the weightings. The stellar performance of technology stocks, and particularly the US giants, during the pandemic brought them dominance of the top positions in the S&P 500 and MSCI World.

The times certainly are a-changing as the clouds of COVID begin to clear. We may not see a crash come to pass, but investors should certainly be aware of the distortion that technology dominance might have brought to their portfolios – particularly if they are heavy on passive investments. Experts are warning that ETF investors could be particularly vulnerable to faltering performance by the technology sector and that signs we are entering a radically different investment landscape are already apparent.

Under the bonnet

The lessons here are twofold. First, investors have to ensure they are always looking under the bonnet of their investments to understand their underlying positions across their portfolio. It is all too easy to become exceedingly over-concentrated in one particular market, sector or even individual stock through buying funds without due care (replication of positions is very common this way). Second, investors always have to bear in mind the eternal warning that “past performance is no guarantee of future returns”.

In essence, what we are seeing is that the beneficiaries of a period where we were all stuck at home living our lives almost entirely online may have now had their time. The corollary is that the unloved asset classes and stocks of the pandemic are in the ascendant.

Oil prices already reflect an awakening hunger for energy as the world gears up for the resumption of normal service and banks, typically a beneficiary of economic recovery, have also been performing well. The sectors people are talking about most, however, reflect what are on most people’s minds: travel and leisure. It is difficult to overestimate the level of pent-up demand that is going to be unleashed once the pandemic is finally behind us and you only have to try booking any kind of trip (or, indeed, a socially distanced trip to a pub) to see how red-hot things are going to be this summer and beyond.

Need for nuance

So, amid all this, should investors join the herd in dumping tech and packing their portfolio with sunshine-orientated stocks? Well, as you might expect, things are rather more nuanced than that.

Buying low and selling high is, of course, what we’re all aiming to do and for this reason alone it can be self-defeating to sell off after everyone else has already started to. On the flip side, if you are buying in when others have already done so, you need to be sure that prices still have a good way to go. Timing the markets correctly is notoriously difficult to do; doing it consistently, almost impossible.

You should certainly take heed of investment trends, particularly when they reflect what’s going on all around you in the real world. Make adjustments of course, however, I’d always be wary of betting the farm.

Perhaps consider portioning off a (relatively small) section of your portfolio to make strong directional calls with, but for the bulk of your wealth you should have a sensible, diversified asset allocation strategy and stick to it. It may sound slightly boring to aim to always have a balanced portfolio, but steady returns and solid risk management really are key to making real money long term.

If the fundamentals of a tech stock were good a few months ago and remain so, then maybe it merits a continued place in your portfolio. Likewise, if a travel firm looked sickly before the pandemic struck, bear in mind that sometimes a rising tide does not raise all ships. Beware either buying or selling stocks based on simplistic sectoral themes.

The “Sage of Omaha” Warren Buffet advises, “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes”. As the great rotation gathers steam, investors need to keep that front of mind.

Manish Vekaria
Manish Vekaria

Founder and CEO of ARQ