Tech stocks are a major boom in the 21st century. One of the best places to invest if you want to make a ton of money is in tech. If you want to beat the S&P 500, your investing strategy probably included some tech stocks. The market is at an all-time high (Nov 2021), it seems like every single day we are reaching new highs and there isn’t a stop in sight.
I want to discuss some reasons you may want to consider NOT purchasing more tech stocks and potentially diversifying into other asset. Full disclosure this is not financial advice and I do personally own tech stocks, I just don’t plan to buy more anytime soon.
Disclaimer, if you don’t have any tech stocks you may still want to purchase some. This article is for people who are relying heavily on tech. I’m also not telling you to time the market, tech could double from now until it crashes and when it crashes it may still be worth more than today’s value. Don’t time the market! If you want to get into tech, a good way would be to dollar cost average, which means buy a little bit every week, or every month for a long period of time (or forever). If the price goes up you buy, if the price goes down, you buy.
Reason 1: Bubble?
Is the stock market going to crash? I have no idea. Will it crash at some point in the future of human history? Almost certainly. People have been screaming about a bubble since the last one ended. It does feel like large dips are becoming more and more common, and the government is printing more and more money to stop a depression. With all that said, DON’T TIME THE MARKET! At least I don’t.
I love tech stocks. Uber, Tesla, Robinhood, Apple, Amazon, Meta, and even smaller companies have my interest and I hope them well. Some tech companies feel very safe, like Amazon and Apple. Other companies have big ideas and lots of potential but on paper are extremely overvalued in my opinion, like Tesla and Uber.
Is tech a bubble? This is the million-dollar question (or the trillion-dollar question for some companies). The short answer is NO, tech is not a bubble, but some stocks might be. For as long as humanity continues to exist there will be innovation which means tech will thrive. There is just one small problem. Right now, we are in a situation where tech stocks are reaching all-time highs across the board, that implies that the best companies are NOT the ones who are growing, the best in the industry are NOT the ones that are getting all the capital. Almost every midrange company is getting large flows of capital and debt flowing into them. Two of my favorite industries to display this is electric vehicles, and many cryptos are operating like tech companies. Some EV companies are worth 10’s of billions of dollars and they have yet to produce more than a few hundred cars. To me that is absolutely insane, and you could not get more speculative than that.
If we look at companies like Uber, they have never been profitable (Nov 2021). That means that since the inception of the company and the massive growth they have seen, this has led to ZERO profit (in terms of EPS). They are of course making money, but they are reinvesting and taking on more debt to grow the company at rapid rates. This industry has also become very competitive with other companies like Lyft (who is also not profitable). These companies will continue to accrue debt because of how competitive the industry is, and there is no stop in sight. They must do it to survive. That’s not a good sign when I’m looking at tech as an industry. If I’m saying this because if for some reason Uber, or Lyft cannot get allocated more cheap debt, like they have since their inception it will be very difficult for them to stay in business. With a quick glance, Lyft has more cash than debt. Uber has nearly 3 Billion more debt than cash. (simplywall.st) Do I think these companies will realistically fail? No.
Many tech companies are operating on a debt basis. They are dumping all their profits and taking on massive quantities of debt to grow, this is a common practice for many growing companies. With many companies in competition for the same market each company is incentivized to leverage as much as they possibly can to beat out their competitor. If the economy slows, if there is a recession, or if rates rise, it may or may not be the end of companies operating like this. Cheap money creates growth, lack of cheap money stops growth.
A company like Uber may be able to survive because they are so well known and have large influence, but anything can happen, and I think that’s important to remember. We are at all-time highs in our market. It has been a nearly consistent bull run for 10 years and any time there is a dip the government increases the money supply for QE purposes. At what point will the FED have to stop doing this? Will they stop? It’s hard to tell how financial policy will play out in the future which is why this article is just a small warning to investigate other industries if most of your money falls into the rapid growth tech category.
I will also say that Amazon, Apple, Google, and the like do not fall into this category. These companies are very profitable and well established and do not fall under the same risks. These may end up being the safest investments for the next century.
Reason 2: No dividends (for most)
What is the point of investing your money? The obvious answer would probably be to make more money, or to allow your money to work for you. Why is this relevant when it comes to dividends? Well, unless the company that you own shares of (the stocks you own) is paying you to be an investor, you are not making any money from owning that stock. When you own a share of a stock, if it is not paying dividends you must sell the share to make your profits. When you have dividends, you can either take those dividends and use them as a form of income, or you can take those dividends and re-invest them back into more shares of the stock. This is usually considered an income stock versus a speculative investment.
Dividends allow you to primary do two things.
- Have a ‘passive’ income for being a shareholder.
- Re-invest your dividends into more shares of the company, which will then give you higher dividends and these will compound over time hopefully becoming larger and larger dividends.
When I look at my investing, I have a few categories. Income, speculation, savings, and value retention.
Dividend stocks fall into the income category, real estate is another example of something that would fall into this category for me. (tech stocks are speculation, cash and stable coins are savings, and bitcoin/gold would be value retention) I don’t recommend that people have all their money in dividend stocks. This may only include small piece of the overall pie. This can also include almost all your investment pie. If I personally wanted a portfolio that to live off, and I was not able to sell or didn’t want to sell any of my investments, dividend stocks are the way I would do it.
Are dividend stocks only for people ready to retire? Younger people benefit from dividends primarily for reason number 2. They allow you to stack up a higher quantity of shares without having to do any extra work. This additional compounding makes it much easier to eventually make enough dividends to pay your bills.
If you are older and have dividend stocks this will probably be a piece of your income. Dividends are a way of making money without having to part with your precious investment principal. Fortunately, some tech stocks do give dividends and those could be considered very good investments if you want to have both rapid growing tech as well as dividends. Apple is a great example of this.
If your investments are paying 0% dividends, and they drop 50%, you lose 50% of your net worth (in tech stocks). If you add dividend paying stocks to your portfolio, you are now more diversified into other industries like real estate, uranium, and the overall S&P or a high yield dividend fund. If this crashes 50% you may be losing 50% of your stock value, but you don’t have to sell the stocks to keep living. You can cut your expenses to continue to live off the dividends and when the shares go back up in value, you haven’t lost anything in the long run. If you survive by selling shares, you will need sell your shares at a very cheap cost just to pay your food bill. When the stock re-gains value you completely lost your shares, so you don’t get any benefit except for the remaining balance on your portfolio.
The choice is yours. Spend your dividends, or re-invest them…
Reason 3: Overallocated
Tech stocks have performed better than nearly every established industry over the last decade, and tech will only continue to grow. You need to decide if you are placing yourself at a high level of risk by being overallocated to this sector. I never recommend selling winners and buying losers, it’s simply not a good strategy in my opinion and with paying taxes it makes it even worse. However, you may want to get into alternative investments. This means stop buying tech stocks and investigate purchasing other assets.
Tech stocks are great to have in your portfolio. They’ve had massive returns for decades, however not all companies survive. Because the returns on some companies have been so good as of recent, you may find yourself with one or two stocks completely dominating your portfolio. Tesla from 2019-2021 is a great example of this. 1% allocation may have turned into over 10%.
I’m not the type of person who would advise selling a stock for the sole reason of it “going up too much” I think that this is an investing fallacy of selling winners to buy more of your losers. This is a mistake I made early in my investing career and I’m glad I learned from the mistake. I don’t like when people or advisors recommend this course of action. However, I will say that if you find yourself in this situation it is important to analyze why the stock boomed so much, and if you think it is likely to continue.
Maybe you want to start investing more money or NO more money into that stock. For example, for Tesla to gain another 500% from its current market cap of $1.02 Trillion dollars, it would have to be worth more than 2x the most expensive company in the world. Is that possible? Sure. Is it likely? I would say no, but I’m not selling my Tesla stock anytime soon.
Starting to find new places to invest is what I do when a single company starts to dominate my portfolio. Selling stocks has rarely been a benefit to me and is not something I personally do anymore. I prefer the option of finding a new industry or a new type of investment all together. For example, going from tech stocks to banking stocks. If you don’t like any other stocks, you may want to go into a new form of investing, like wine, real estate, or crypto.
The safe option is always to just buy an index fund and call it a day. Examples include VOO, VTI, and SPY. They also have index funds that are focused on dividend companies, one that I have is SCHD but there are many options to choose from.
Reason 4: S&P is a massive tech stock
In 2021 the top 5 tech stocks makes up around 25% of the S&P.
If you are investing in an S&P 500 index fund, you are already exposed heavily to companies like Meta (Facebook), Amazon, Netflix, Google, and Apple. Index funds do not allocate equally to all 500 companies, they invest in companies based on their market caps meaning bigger companies get a larger percentage of the investment.
So, if you are an S&P investor, and you think you need more exposure to tech, just know that you already have around 25% of your shares invested in these large tech companies.
It may not be a bad thing to purchase more tech stocks but remember most index funds give you a dividend and exposure to tech stocks, it may be the best bet to just keep investing in these diversified funds. Having all your eggs in the S&P 500 basket is a safe investment but is quite risky to do as your only investment. You never know what could happen. If you don’t want to think about your investing in detail it is a good place to dump your money.
Reason 5: The industry is highly leveraged, in massive debt, and many companies are not profitable
If the gov stops printing money there will be less capital available to finance these companies, if the fed raises interest rates there will be less capital available for financing.
Many of the small to mid-range companies are in massive debt. They are doing this to compete with other companies in the same market as well as to grow as fast as possible.
The reason this is highly risky is because if any dip in funding happens, they can very quickly go bankrupt. There are many factors out of their control that could affect their company’s outcome which is why I personally choose to only allocate a small percentage of my portfolio to these highly leveraged companies. I love tech stocks, but most of my stocks are through index funds and my IRA, only about 10% are in individual stock picks. Most of my individual stocks are tech but these are effectively betting that I’m making based on the information I currently have. I understand these companies could fail, even if they provide a great product. I understand if I want to make profit from these investments, I will have to sell the shares I own because they are not going to be paying dividends any time soon if ever.
I hope that you enjoyed this article and it added to your perspective on tech stocks. Once again this was not financial advice, it is just some things I am thinking about during this bull market. Tech stocks are not bad, they may still be the best investment choice of the next decade. Just choose wisely and do lots of research, hype investing usually doesn’t end well.
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