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Don’t Get Distracted (or Greedy)

The stock and bond markets have had a bumpy start to 2018.  But one area of the stock market in particular is having a wonderful year so far: technology stocks.  The tech-heavy Nasdaq 100 is up 13.22% year to date (as represented by QQQ).  Meanwhile, the S&P 500 is only up 3.81% and the international stock market (represented by MSCI ACWI ex US) is down -3.52% for 2018.

So what exactly is lifting the Nasdaq 100?  Big tech names we all know are crushing it so far this year:

Amazon up 47.95%

Apple up 10.39%

Microsoft up 19.22%

Google up 11.02%

Facebook up 14.19%

Netflix up 116.42%

An investor with a diversified portfolio may be hearing this for the first time or, even worse, may have already heard/read about it from their co-worker, neighbor, or in-law.  It’s common for people who are overweight in an investment that is doing great to make sure everyone around them knows it.  They rarely, if ever, tell you when their big bet on an investment goes sour.

These are difficult moments for diversified investors because just about nothing has kept up with large US tech stocks this year.  US small cap stocks are the only thing close with the Russell 2000, up 9.99% year to date.  REITs, bonds, international large and small stocks, and emerging markets stocks are all down for 2018.

Don’t let the upward run in tech stocks distract you from sticking with your diversified portfolio.  No one investment category outperforms each and every year.  And being diversified will mean you always own something that underperforms, except that the investment category that underperforms changes each year.

It may be very tempting to add more exposure to tech stocks but I’d caution against this idea.  We have a term for this in the investment industry: “performance chasing.”  Investors have an amazing track record of throwing more money at whatever has gone up recently and the results have been terrible.  I’m certainly not suggesting that tech stocks are about to crash; just recognizing that the higher the price paid for an investment, the lower the expected return.  Successful investing involves buying something before it has a huge run up in price.

The moments where you need to exercise patience and discipline prove to be some of the toughest in investing.  Stick to your plan and don’t let your emotions (fear or greed) push you to make a portfolio mistake.

Steven Elwell, CFP®
Partner, Vice President

Steven Elwell
Steven Elwell