The epicenter of the economic crisis has largely been in services, severely bruising industries like retail, hospitality, travel, food services, and airlines. As these areas of the economy struggle to survive, many technology companies have been thriving. The economy has been steadily evolving into \u2018digital everything,\u2019 and companies that build and\/or service the digital infrastructure have seen rising demand. Many investors are noting this trend and flocking to companies at the forefront of enterprise cloud, remote work, e-commerce, cyber-security, and digital advertising.<\/p>\n
That\u2019s why I think now is a good time to urge caution. The growing enthusiasm among investors to rotate heavily into technology, in an effort to capture trends of the \u2018new economy,\u2019 comes with its own set of risks.<\/p>\n
For one, looking back to the 1990\u2019s offers some lessons to consider. Take 1999, for instance, which was the apex of the technology bubble. Perhaps the biggest story of the year in the stock market was for a company called Xcelera.com, which was formerly known as Scandinavia. Never heard of it? That\u2019s because today it is no longer a public company.<\/p>\n
A similar story that year was enthusiasm for a company called Commerce One, whose business model was focused on using online auctions to connect businesses with suppliers. When the company filed its IPO in 1999, the stock shot up 190%.1<\/sup> It filed for bankruptcy four years later.<\/p>\n Still, there were other darlings of the tech bubble in 1999 whose businesses withstood the test of time. Qualcomm was one of the best performing stocks in 1999, and remains a strong company to this day. The point I\u2019m making here is that rapid-fire growth in a sector like technology almost always produces a set of winners and losers, with the losers usually far outnumbering the winners. For investors hoping to \u2018ride the wave\u2019 of digitization in a post-Covid world, it is important to recognize that many companies in the emerging space will ultimately not do very well, or even survive. It is very difficult to predict who the winners will be.<\/p>\n Another reason I would urge caution is that tailoring your investment strategy to the \u2018new economy\u2019 may mean chasing past performance and\/or over-concentrating your portfolio in one sector \u2013 two classic investment errors, in my view. You have probably heard a thousand times that past performance is not indicative of future returns, but it is an easy principle to forget when a category like technology has been outperforming so robustly and has a solid growth outlook. Technology will not outperform forever.<\/p>\n Shifting a portfolio heavily into technology stocks may also mean sacrificing diversification in the process. Diversifying a portfolio helps reduce risk over time because you maintain exposure to uncorrelated assets \u2013 when some sectors zig, others zag, and vice versa. Technology cannot continue outperforming indefinitely, and when leadership changes hands, which in my view is only a matter of time, it is important for investors to have some exposure to whatever category emerges as the new leader. That is not always possible when you\u2019re over-allocated to one sector.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n I am not urging caution in this column because I think the digital evolution is a phase or a fad. I believe many of the accelerating trends that we are seeing today, such as remote work, cloud, e-commerce, and digital infrastructure, were already happening before Covid-19 arrived. The pandemic is merely accelerating trends that were already underway.<\/p>\n I\u2019m urging caution because I think it is important for investors not to over-commit to these accelerating trends, particularly if doing so means over-concentrating your portfolio\u2019s allocation to one sector and compromising portfolio diversification in the process.<\/p>\n","protected":false},"excerpt":{"rendered":" The epicenter of the economic crisis has largely been in services, severely bruising industries like retail, hospitality, travel, food services, […]<\/p>\n","protected":false},"author":3,"featured_media":4784,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7835","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7835","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7835"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7835\/revisions"}],"predecessor-version":[{"id":8734,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7835\/revisions\/8734"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7835"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7835"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7835"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}