It’s tough to sell a stock when it is on a winning streak. Companies like Facebook, Amazon, Apple, Microsoft and Alphabet have all continued to march higher, with seemingly better and better results. These results have helped to push U.S. markets into record territory. Big tech names have been fueling this year's rally that has added more than US$500 billion in market capitalization.
While there may not currently be any reason for these stocks not to continue on an upward trajectory, sometimes you don't need a concrete reason for a selloff to happen. We had a little taste of that on Friday, when a research note from Goldman Sachs chief investment officer warned the low volatility in some of the big tech names may be blinding investors to their risks. Those risks included cyclicality, disruption, and regulation, to name a few. Any one or all of these risks could wipe out your gains in just a number of trading sessions.
Now to be fair, stocks pull back all the time and no one knows for sure whether the sentiment is shifting for the long term in the tech sector, or if this is simply profit taking. But does it really matter? Friday's performance on the Nasdaq pulling back 113 points on the day and 1.55 per cent on the week, should be the nudge we all need to take a look at our portfolios to ensure we are staying to true to our asset allocation.
Asset allocation is what makes diversification work and is what drives your returns.
If you have a 60/40 split in our portfolio – 60 per cent stocks and 40 per cent bonds – and market performance has thrown it out of balance, while it seems counterintuitive, you should sell some of your winners and buy more of your losers. And that includes some of the tech darlings you have come to love. This is easier said than done when the markets keep charging higher, but no trajectory is straight up and the markets will correct. We just don't know what the catalysts will be. It could be something as innocent as a research note warning of complacency.
It is easy for all of us to believe in our own predictive powers, especially if we have had some winners in the past. Don't be tricked into a herd mentality. If everyone else is getting into a stock, that doesn't mean you have to as well.
And, finally, never lose sight of the number one rule of investing: buy low, sell high.