WealthBT: More bite to tech stocks than just FAANGs
Lee Kim Siang
THE recent surge in US tech stocks has many investors feeling the pressure to jump on the bandwagon. With companies like Nvidia leading the charge — up an astonishing 143 per cent year-to-date — questions abound about whether it’s too late to invest in tech.
In this episode of WealthBT, a podcast of BT Correspondents, Genevieve Cua, wealth editor of The Business Times, speaks with Dr Wei Dai, head of research at Dimensional Fund Advisors, on how to approach investing in tech stocks and the broader market.
The tech stock boom
The tech sector has long been a focal point for investors, especially with the rise of artificial intelligence (AI). Major players such as Nvidia, as well as the so-called “Magnificent Seven” stocks — comprising the afore-mentioned Nvidia along with fellow tech giants Meta (formerly Facebook), Amazon, Apple, Netflix, Google, and Tesla — have seen significant returns. While the FAANG (minus Nvidia and Tesla) stocks have appreciated by 29 per cent this year, the Magnificent Seven have risen by 42 per cent. This performance has led many to wonder if they’ve missed the opportunity to invest in tech.
The risks of chasing performance
Dr Dai cautions against FOMO or the fear of missing out, which can lead investors to chase after high-flying stocks without a sound investment strategy. She emphasises that identifying a great company does not equate to identifying a good investment. Investors must consider valuations and the price they are willing to pay, as excessive valuations can lead to lower expected returns.
She also encourages investors to diversify their portfolios to mitigate risks associated with concentration in a few high-performing stocks. By owning a broad range of assets, investors can reduce the impact of poor performance from any single stock or sector.
Diversification: The key to long-term success
One of the most effective ways to combat FOMO is through diversification. As Dr Dai explains, the impact of technological advances extends far beyond just chipmakers like Nvidia. Many companies across various sectors are capitalising on AI technologies to enhance efficiency and scalability. A well-diversified portfolio can capture the benefits of technological advancements without being overly reliant on a few individual stocks.
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She shares in the podcast some suggestions on what investors should consider.
The concentration risk in tech stocks
Concerns about concentration risk are valid, especially as tech stocks dominate major indices. For example, the S&P 500 has over 30 per cent of its value tied to tech stocks. While concentration levels have increased, this phenomenon is not entirely new. Historical precedents show that top-heavy markets have existed before, and while diversification is crucial, investors should not panic.
The importance of a long-term investment strategy
As the Federal Reserve has cut interest rates, many asset managers encourage investors to move out of cash and into the markets. However, investment decisions should not be solely based on short-term market movements or economic events.
Listen to the full episode to find out what Dr Dai advises one should do to maximise returns.
Investing in tech stocks presents both opportunities and challenges. While the recent performance of companies like Nvidia is impressive, it’s essential for investors to approach this sector with a well-defined strategy. By diversifying their portfolios, avoiding the pitfalls of FOMO, and focusing on long-term objectives, investors can position themselves for success in the ever-evolving tech landscape.
For more insights on investing strategies and market trends, keep listening to WealthBT, a podcast of BT Correspondents, where we explore the financial topics that matter to you.
If you have any thoughts or questions about the show, email us at btpodcasts@sph.com.sg.
More from Genevieve Cua:
Fund giants aim to bring private markets to retail investors – but mind the risks
Retirement investing: Go for simplicity, low costs and risk control
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