Author Topic: Too much tech in my portfolio  (Read 1349 times)

marcus_aurelius

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Too much tech in my portfolio
« on: August 06, 2020, 11:21:59 PM »
Wonder what long-time investors will say to my stock portfolio situation.

Iím 46, married, living in VHCOL Silicon Valley. We have about $1.4M together in 401K/IRAs, almost all of it in low-cost Vanguard funds. Also an additional $160K in REITs and ~$210K cash as a rainy day fund. So far so good.

This is about my non-401K investments. Over the last 10 years, but mainly in 2013-2016, I have invested ~290K in a mixture of tech companies. Overall, that portfolio has now grown to 728K, mainly in Microsoft ($190K), Amazon ($105K), Apple ($55K), Google ($51K), and Netflix ($40K). The rest is in other tech stocks (PayPal, Splunk, Salesforce, etc.) In all that time, I sold just one stock ó $30K of Tesla that I bought for $14K. (I couldnít bear the wild and crazy swings Tesla was going through at the time. Wouldíve been worth almost $100K today but I can live with that.)

I have thought multiple times over the last few years of balancing the tech portfolio but it kept increasing, and so I didnít touch it and just let it be. It shrunk down to ~$470K back in March, but I hung on and it has grown well past its previous high water mark.

All of this started before I knew a lot about indexing. I know that I've been lucky. I work in tech in the Bay Area and do know more about tech that the average guy, but not more than the typical analyst. I didnít look at a single financial statement before investing. I just bought companies that I thought were well-positioned for the cloud and AI shifts underway. When Microsoft or Amazon went up, I bought some more every month, and that process just continued. It wasn't systematic at all and I didn't have a pre-set exit criteria for a single stock. Like I said, I've been lucky. :-)

I stay convinced that the companies in my portfolio are for the long term, but I do think that they are overvalued today. Question is, what would you do in my situation? Taking some profits (minus long term capital gains) and reinvesting someplace else makes sense but would appreciate more of a plan from experienced investors.

Abe

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Re: Too much tech in my portfolio
« Reply #1 on: August 07, 2020, 12:17:45 AM »
Youíll should start selling the shares with long-term gains and investing into your index funds such that your desired asset allocation stays the same. Not much else to it. Just need to avoid short-term gains otherwise youíll have a big tax bill.

The timeframe to do this is up to you. Volatility is going to be high, so just set a schedule and follow through. Donít try to time your sales.

vand

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Re: Too much tech in my portfolio
« Reply #2 on: August 07, 2020, 02:04:19 AM »
I don't think that you give yourself enough credit. You might well have had a bit of luck with your stock picking, but since then you've done really well to just leave your stocks alone and let them grow and ride the outrageous bull market we're in. Most people would have tinkered and taken their profits long ago.


I think you should take a straightforward asset allocation approach to this and determine how much of your portfolio you are happy to have in your own hand picked stocks - determine you baseline percentage, and then your rebalancing boundary at which point you will rebalance back to the baseline.

« Last Edit: August 07, 2020, 02:21:40 AM by vand »

ChpBstrd

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Re: Too much tech in my portfolio
« Reply #3 on: August 07, 2020, 10:21:06 AM »
Congrats! You could Fat-FIRE in most areas of the US.

The risk is that we have a 2000-style tech meltdown and you lose 40%. Another risk is that these investments go nowhere for years as earnings growth slows and valuations play catch-up.

However, if I were to suggest you reallocate to VTI and VOO plus a hearty allocation of bonds yielding 2% instead of these big tech names, that would be kinda like a poor person telling a rich person how to make money, wouldnít it? For the past decade, the buy-and-hold people who concentrated risk have far outperformed those who avoided or mitigated risk (the day traders blowing up on wall street bets are another story of course). Thus the ďshould I reallocate?Ē question requires some context on your risk tolerance.

So do I think your current portfolio is safe to retire on at a 4% withdrawal rate? No. If you plan to retire in the next 5 years I suggest finding a way to reduce industry-specific and stock-specific risk and your high beta.

If you donít have specific plans, then the volatility of your high-risk portfolio maybe doesnít matter as much. You managed to hold through March so thatís a good sign you can handle the volatility!

hodedofome

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Re: Too much tech in my portfolio
« Reply #4 on: August 07, 2020, 06:31:28 PM »
100% of my net worth apart from my house is tech stocks. Thatís over $600k in tech stocks btw. Most of it is smaller SAAS companies but I have AMZN, AAPL, NFLX and MSFT as well. This is the golden age of SAAS so if I were you Iíd just stick with what youíre doing. When we return to a market like the 90s, then you can start to sell. Weíre nowhere like that market however. The long term bull market in tech stocks will not end without a bubble bursting. Hang on for at least another 5 years and wait until grandmas start buying tech stocks and your Uber driver is day trading tech stocks on his phone while he picks you up.

Another indicator is if the country club at the golf course has CNBC on the tv instead of sports.

This is an excellent white paper recently published by ARK Invest and is what Iíve been saying for a few years now. https://drive.google.com/file/d/1Su8RvqmIZEVsB8gcx47Hv6fHp-HehYor/view?usp=drivesdk
« Last Edit: August 07, 2020, 06:35:50 PM by hodedofome »

Abe

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Re: Too much tech in my portfolio
« Reply #5 on: August 07, 2020, 09:56:39 PM »
I would strongly advise against trying to time the market, especially a bubble. The reason so many people lose money in a bubble is not the run-up, but the failure to recognize over-valuation. A large part of the reason is that values in a bubble are by definition not based on objective data but subjective sentiment. The ďmetricsĒ given above for when to sell are I think in jest. I would not determine what to do with your life savings based on what an Uber driver is or isnít doing.

Capture your gains and diversify. You wonít be sorry if you perform average, and that is much more likely in the long run than if you are heavily weighted to one industry. That is well established. The scenario where I would say continue investing heavily in certain companies Is if you have good evidence that those companies in particular will continue to grow above average for the market as a whole. that amount of analysis is usually a full time job.

hodedofome

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Re: Too much tech in my portfolio
« Reply #6 on: August 07, 2020, 10:53:28 PM »
A true bubble is easier to spot than you think. In 2011 I couldnít drive to the grocery store without seeing someone with a sign on the street corner trying to buy gold. It was everywhere. When you have stay at home moms opening up a gold store cause itís easy money, youíre near the end.

A bubble is not just over valuation (which is a relative term and can mean anything). A bubble is just about all of society jumping in on a trade because you can make fast money from it. Look up
The stories from 1999, when companies were going public with no revenues and people were falling over themselves to buy the stock. It was a crazy time and white collar workers were quitting their jobs to be a day trader.

We donít have anything like that now, and this bull market in tech stocks wonít end for good until another bubble forms. You can timestamp me on this.

GoCubsGo

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Re: Too much tech in my portfolio
« Reply #7 on: August 08, 2020, 10:25:30 AM »
I disagree with the part about blindly selling now.  You might feel sorry if that portfolio holds up or continues to grow and you sold and just performed average. Why? Because it may shave YEARS off FIRE if you can keep a careful eye on it and sell when you don't feel comfortable any more. 

I've also been tech heavy (and also a bit uneasy if I'm honest) but my FIRE date has dropped nearly 5 years because of this allocation.  I have a set level where I will start to sell. If it all goes down 40% in 5 minutes,  I'd be screwed, otherwise I can react to a big downturn pretty quickly so I don't see a huge amount of risk. 

You aren't stuck with this current allocation for life and there is no real reason to sell really good companies that have huge competitive advantages and fortress like balance sheets just because everyone else sticks to a certain allocation.  To each their own I guess, but there are real advantages to investing in strong companies and keeping a close watch on them.

vand

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Re: Too much tech in my portfolio
« Reply #8 on: August 08, 2020, 10:38:42 AM »
Another strategy is do a partial-rebalancing that works in a stair-step fashion.

So say you have 20% in asset A, set an initial rebalance point at 25%, but don't rebalance back to 20%, just sell down to 22.5%. Then set your next band at 27.5% and when it hits that sell down to 25%, then 30% and sell down to 27.5%, then 32.5% and sell down to 30% etc. Two step forward, 1 step bagged.

That way you are still more and more heavily invested in the best performer in you portfolio, but at the same time you're still taking a little off the table ready for when it eventually turns around (which they all do.. eventually). 

Abe

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Re: Too much tech in my portfolio
« Reply #9 on: August 08, 2020, 06:28:12 PM »
He has $2.5M saved, so can retire whenever he wants. Also, re-evaluating his allocation, he can probably lose the tech stocks completely and not be too affected. He should now be focused on protecting his savings. Even something generating a boring 4% return in todayís low-inflation environment will give $100k in returns a year. In general, going from $2.5 to $3m isnít going to make a huge difference in quality of life. Going the other way may (but also probably not).

Also rebalancing to an allocation one is comfortable with is by definition not blindly selling. If he feels uneasy about having so much in tech, that means he had too much in tech. Itís about what heís comfortable with long term, Iím just trying to help him see that the game is won, and now itís time to cash in on the reward (financially and otherwise).

MustacheAndaHalf

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Re: Too much tech in my portfolio
« Reply #10 on: August 09, 2020, 03:10:50 AM »
@marcus_aurelius - Do your retirement plans involve buying a house in Silicon Valley?  The average Silicon Valley house costs about half your NW, and it's a VCOL area with higher expenses.  Retiring elsewhere makes it much easier to retire.

You should be careful of overlapping risks, like your job and investments.  If the tech stocks were to crash, it's much more likely tech companies would have layoffs, and you might be out of work.  So keep in mind those two events are more likely to occur together.  It's good that you have a significant emergency fund.

GoCubsGo

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Re: Too much tech in my portfolio
« Reply #11 on: August 09, 2020, 11:13:09 AM »
We actually don't know what he needs to retire (especially living in silicon valley).  His target could be much higher.  Some people retire on $500K, some people are shooting for 10x that (check the Bogleheads Forums).  We also don't know when he wants to FIRE or anything else about retirement needs.

I agree if it doesn't match his current risk profile that he should sell some.  The fact that he works in tech is a decent reason to deleverage.  He does have $1.4 million in low cost index funds so he does have exposure other than tech and does have a healthy rainy day fund .  Maybe pare down some of your positions and keep some of that tech stocks if you still like them.  Again, I have a set written plan in place so I'm comfortable holding out until my plan says otherwise.  My biggest issue is what sectors I'd like to put that money into once I sell.  Eventually we should have a rotation back towards some of the sectors hit hardest by the pandemic so I'll probably head to more value type stocks.  Again, I enjoy this part of investing so to each their own.

ChpBstrd

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Re: Too much tech in my portfolio
« Reply #12 on: August 10, 2020, 03:39:52 PM »
I would strongly advise against trying to time the market, especially a bubble. The reason so many people lose money in a bubble is not the run-up, but the failure to recognize over-valuation. A large part of the reason is that values in a bubble are by definition not based on objective data but subjective sentiment. The ďmetricsĒ given above for when to sell are I think in jest. I would not determine what to do with your life savings based on what an Uber driver is or isnít doing. .

It seems the only way to participate in the rise of a bubble is to ignore valuations, and the only way to get out before it pops is to pay attention to valuations. It would be a rare person who could do each in the right order at approximately the right times.

In terms of which strategies win or lose the bubble game, it seems strict B&H simply rides the bubble up and down for no net difference with market returns / volatility. Momentum gets murdered. Someone with a valuation rule (E.g. P/S ratio or P/FCF) might sell at some point on the way up and then buy at the same valuation point on the way down. Whether that trade is profitable depends on a lot of unpredictable factors.

Your implication that we observe cultural factors is intriguing, though one must wonder if it is subjective or if tech enables more stock market chitchat. There is also the risk that if we go looking for market chitchat, the algos will figure that out and send a flood of it our way. Something like social distancing, a trend toward working from home, or changing cultural norms about money could give false signals. Do you have any non-subjective measurements such as the retail participation rate?


 


marcus_aurelius

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Re: Too much tech in my portfolio
« Reply #13 on: August 11, 2020, 09:42:29 PM »
Wow, thanks for all the replies. You guys are awesome and I learned a lot. I agree that it's very difficult to spot a bubble. However, I think right now, the probability of the market climbing even higher is lower than that of a correction. I'm not getting out -- I'm definitely staying in the market but locking some of my gains.

I don't want to FIRE in the next few years. We still owe $290K mortgage on our home (worth $1.9M according to Zillow. It's an average home in Cupertino, nothing fancy.) Although the mortgage interest rate is just 2.5%, I'm thinking of selling $120K in gains, pay 15% LT gains, and pay off almost $100K in mortgage principal. This will accelerate our mortgage and we will be mortgage free in about 3 years (when I turn 50, which was the goal). This still leaves me with $600K tech stocks, which is plenty of exposure.

(I know that paying off the mortgage early, especially a low interest one, isn't popular on this site, but this works for me. It's the only debt we have.)

Vand, I like your idea. This is something I can do from time to time.
"So say you have 20% in asset A, set an initial rebalance point at 25%, but don't rebalance back to 20%, just sell down to 22.5%. Then set your next band at 27.5% and when it hits that sell down to 25%, then 30% and sell down to 27.5%, then 32.5% and sell down to 30% etc. Two step forward, 1 step bagged."

Also hodedofome - thanks for the Google doc. It was a great read and I agreed with it 100%.

Mighty-Dollar

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Re: Too much tech in my portfolio
« Reply #14 on: August 12, 2020, 12:02:37 AM »
Tech has been holding up GREAT during this coronavirus. Tech seems to be recession-proof. Those are all great companies. Still, I would rather you owned an ETF like XLK or XP. If you get out, then do so in a tax-efficient manner.

marcus_aurelius

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Re: Too much tech in my portfolio
« Reply #15 on: August 12, 2020, 12:11:33 AM »
Tech has been holding up GREAT during this coronavirus. Tech seems to be recession-proof. Those are all great companies. Still, I would rather you owned an ETF like XLK or XP. If you get out, then do so in a tax-efficient manner.

What would tax-efficient mean? I'm holding all these stocks for a minimum of 3 years, so I assume I will pay the long-term capital gains of 15% on any profits. Am I missing anything?

MustacheAndaHalf

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Re: Too much tech in my portfolio
« Reply #16 on: August 12, 2020, 05:27:09 AM »
Oh, you bought a house and have over 80% equity.  That makes your tech stock allocation even less of a risk.  A number of people view "paying off the mortgage" as an important life event, and more valuable than investing that amount.

I really like Vanguard's nest egg calculator: it has few moving parts, but it's the critical ones.  You provide the years until retirement, percent/amount withdrawal, and ratio of stocks/bonds/cash.  Then Vanguard runs 10,000 simulations and displays the results.
https://www.vanguard.com/nesteggcalculator

park10

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Re: Too much tech in my portfolio
« Reply #17 on: August 15, 2020, 11:01:20 AM »
Wonder what long-time investors will say to my stock portfolio situation.

Iím 46, married, living in VHCOL Silicon Valley. We have about $1.4M together in 401K/IRAs, almost all of it in low-cost Vanguard funds. Also an additional $160K in REITs and ~$210K cash as a rainy day fund. So far so good.

This is about my non-401K investments. Over the last 10 years, but mainly in 2013-2016, I have invested ~290K in a mixture of tech companies. Overall, that portfolio has now grown to 728K, mainly in Microsoft ($190K), Amazon ($105K), Apple ($55K), Google ($51K), and Netflix ($40K). The rest is in other tech stocks (PayPal, Splunk, Salesforce, etc.) In all that time, I sold just one stock ó $30K of Tesla that I bought for $14K. (I couldnít bear the wild and crazy swings Tesla was going through at the time. Wouldíve been worth almost $100K today but I can live with that.)

I have thought multiple times over the last few years of balancing the tech portfolio but it kept increasing, and so I didnít touch it and just let it be. It shrunk down to ~$470K back in March, but I hung on and it has grown well past its previous high water mark.

All of this started before I knew a lot about indexing. I know that I've been lucky. I work in tech in the Bay Area and do know more about tech that the average guy, but not more than the typical analyst. I didnít look at a single financial statement before investing. I just bought companies that I thought were well-positioned for the cloud and AI shifts underway. When Microsoft or Amazon went up, I bought some more every month, and that process just continued. It wasn't systematic at all and I didn't have a pre-set exit criteria for a single stock. Like I said, I've been lucky. :-)

I stay convinced that the companies in my portfolio are for the long term, but I do think that they are overvalued today. Question is, what would you do in my situation? Taking some profits (minus long term capital gains) and reinvesting someplace else makes sense but would appreciate more of a plan from experienced investors.
Congratulations....One easy way to 'protect' the profits and protect against severe pullbacks would be to do a cashless option collar....Sell a call above the current price and use that credit to buy a put below current price. what you are doing is agreeing to sell above todays mkt price in return for protection against pullbacks. this can be done on cashless or almost cashless manner. if neither high nor low levels are breached, the collar expires, and just write a new collar, again cashless. if price does break above your sold call, you can either roll the call (buy it back and write next months even higher strike call) so as to keep your shares or you can sell them at the higher price. you can keep on doing this until the end of time. i can give specific example if there is interest.