Advisers warn tech-heavy portfolios risk repeating dotcom-era errors

Technology shares and the so-called Magnificent Seven have driven US equities to record gains, raising concern among market professionals that some portfolios are taking on dotcom-era concentration risk. CNBC reported that financial advisers are urging investors to review exposure to high-growth technology names, particularly where core index holdings already contain large allocations to the sector.

The concern is less that the current market is identical to the late 1990s than that investor behaviour can rhyme. Seth Hickle, chief investment officer at Mindset Wealth Management in Indianapolis, told CNBC that investors often buy into a sector after strong gains, pay less attention to valuation and overestimate their tolerance for losses until volatility arrives.

High-profile market figures have also sounded cautious notes. JPMorgan Chase chief executive Jamie Dimon told CNBC contributor Wilfred Frost that he would not buy stocks at current valuations, and added that he would not buy long-dated Treasurys either. Warren Buffett told CNBC’s Becky Quick that it is difficult to find value when market participants prefer gambling.

Index funds already carry technology exposure

Advisers cited by CNBC said many investors may hold more technology exposure than they realise. Aaron Ulrich, owner of Integra Financial Planning in Prospect, Kentucky, said clients frequently ask about companies such as Nvidia, Tesla and Apple without recognising that those stocks may already be present in diversified holdings.

Shannon Saccocia, chief investment officer of wealth at Neuberger Berman in New York, said an exchange traded fund tracking the S&P 500 can provide meaningful technology exposure while still offering broader diversification. She also said investors can consider exposure outside large US companies, including small-cap stocks, international companies, emerging markets and energy businesses.

The structure of popular benchmarks can add to concentration. CNBC reported that the Nasdaq 100, while a common core holding, excludes financials and had close to 70% of its portfolio in technology as of June 30. It also overlaps substantially with the S&P 500, a factor advisers said investors should consider when assessing diversification.

Advisers point to limits on thematic bets

Hickle told CNBC that investors interested in themes such as artificial intelligence should first build a diversified core equity portfolio. He said roughly 80% of equity exposure, depending on age, time horizon, risk tolerance and other personal factors, should be broadly diversified, leaving about 20% for thematic or sector positions.

Those thematic positions can include individual shares or sector ETFs, including funds that divide the S&P 500 into industries such as financials, health care and energy. CNBC reported that the ETF market also includes funds focused on AI, other technology innovations and areas such as space stocks. Hickle said investors should check whether those funds duplicate positions already held in their core portfolio.

Neale Ellis, founding partner and co-chief investment officer at Fidelis Capital in Dallas, told CNBC that holding a single sector ETF can leave an investor exposed if the thesis proves wrong. CNBC also cited hedged equity ETFs, including JPMorgan Hedged Equity Laddered Overlay ETF, T. Rowe Price Hedged Equity ETF and Parametric Hedged Equity ETF, as examples of products designed to offer some participation in gains while limiting downside exposure.

Taxes can shape exit decisions

Dan Sudit, partner at Crewe Advisors in Salt Lake City, told CNBC that investors should decide before buying what they own, why they own it and when selling would make sense. He said investors in the dotcom period often lacked a plan for taking gains, which contributed to losses when high-flying stocks reversed.

Tax treatment can complicate those decisions. CNBC reported that short-term capital gains are taxed at ordinary income tax rates, while holdings kept for more than a year are taxed at long-term capital gains rates. Sudit said growth investments can create large capital gains if sold after sharp appreciation.

Ulrich told CNBC that tax-loss harvesting, selling securities at a loss to offset gains or reduce taxable income, may be available in some cases. He added that even a tax cost may be justified if an investor’s portfolio carries more risk than intended.

This story draws on original reporting from CNBC.