Sure, their performance has been fabulous over the past decade and they’re accomplished and well known businesses, but that does not guarantee their success in the future.
Most people have already heard the reasons tech companies are hot right now. What you probably don’t hear are the arguments for why to avoid them. That in itself should be a red flag.
To play devil’s advocate these are 9 reasons to avoid over-investing in tech.
1. Your mind tricks you
Facebook, Apple, Google, Amazon and Netflix have all benefited from the internet, new technologies and the deflationary forces that have come with them. However, everybody knows how amazing these companies are now. It’s not new information. Thousands of analysts and fund managers analyse them daily, so anything you read is already factored into their share prices.
Buying because of a good backstory is classic hindsight bias (looking backwards to make predictions about the future), narrative fallacy (our urge to believe a good story), herding (following the crowd) and familiarity bias (preferring to invest in companies we know). Together a dangerous mix of biases sending you up the wrong path.
2. Everyone’s doing it
Flows of money into tech stocks have been relentless. The biggest tech share ETF in the US (QQQ) had its second biggest day of inflows ever on February 27th with US$2.7 billion in a single day, only beaten by the very top of the 2000 tech bubble. Total funds in this ETF stand at US$65.7 billion, more than double the size of the entire ETF industry in Australia!
Meanwhile in Australia the SMSF Benchmark Report from Class shows 8 of the top 10 global shares held by Self Managed Super Funds (SMSFs) were tech shares. Tech shares make up 64% of SMSFs top 20 global investments, yikes! It’s like there aren’t other sectors to invest in…
Source: Class, SMSF Benchmark Report 2017
3. Relative size
The tech sector makes up more than 25% of the entire US share market. That has only happened once before in history, in 2000 before the tech crash. Technology is larger than the consumer staples, energy, materials, real estate and telecommunications sectors combined. Include ‘consumer tech’ businesses like Amazon, Netflix and Expedia it’s even larger.
4. Who’s buying from you?
When markets peak it’s usually not because of bad news but because they’ve run out of buyers. Everyone already owns tech shares – and lot’s of them. Who are the next buyers going to be?
5. Tech share funds targeted at novices
Have you noticed most new share trading apps and super funds have a technology angle? One platform says ‘invest in the disruptors…’ while another promises to ‘invest where the world is going’.
These trading apps and super funds target people who don’t have the experience to know that putting your chips on one sector is an extremely unreliable strategy. Typical market peak stuff. Retail investors are always the last ones in to any trend – when perceived risk is low but actual risk is high.
Societies don’t like it when a few companies have a large amount of influence or control. Big consumer tech companies fit squarely into this category and are taking heat over tax dodging, data privacy, offshoring jobs and political interference.
According to an Axios survey, the percentage of Americans who are concerned that the government wont do enough to regulate U.S. tech companies has increased from 40% to 55% in the last 4 months. That’s a seismic shift in public perception. It’s only a matter of time before governments reduce the influence of these companies with new laws and regulation that hurt their profitability and competitive advantage.
7. Silly business
Fairfax journalists recently revealed very unusual activity going on at some large ASX listed tech companies including Get Swift and Big Un. The investigation resulted in Get Swift’s share price falling 85% (so far). Big Un is still suspended. That’s significant; these were companies worth hundreds of millions of dollars at their peaks late 2017. Anyone remember One.Tel?
High profile collapses should be another forewarning for tech investors.
You mightn’t think Bitcoin belongs in an article on why not to buy tech stocks today but it’s yet another sign that speculative activity has stretched way too far. Over US$700 billion found it’s way into bitcoin and other cryptocurrencies in 2017. I’m a big believer in this technology long term but there’s plenty of hot air that needs to come out first. The 70% fall in Bitcoin in early 2018 should be a wake up call for those invested in broader tech.
9. The future
Many of the tech shares from the internet 1.0 days like Yahoo, GeoCities and Netscape no longer exist or are a fraction of their former selves. While it’s hard to imagine, future companies may usurp the tech giants of today because of new technology and changing consumer preferences.
Successful long term investing requires you to spread your money across all sectors of the share market as well as other assets entirely like bonds and gold. This helps to even out the inevitable peaks and troughs of the market cycle. Re-balancing your portfolio out of what’s hot and into laggards helps to reduce risk and generate better quality returns.
We made changes to the Stockspot portfolios late last year that had the effect of reducing exposure to tech shares to around 6% of the portfolios.
Technology is an important part of the global economy but too many tech shares in your portfolio right now is a dangerous bet.
Find out how Stockspot makes it easy to grow your wealth and invest in your future.