As the market makes new highs, technology stocks lead the way. Technology’s contribution to our daily lives fosters fierce loyalty which causes many investors to overlook the risks. One of my managers, Wayne Himelsein, has made a lot of money with tech stocks like AMD and Nvidia. Last week, he bought AES, an energy company, because it showed signs of strength as good as any tech stock, and diversified his portfolio. Today, I asked Wayne whether we should be getting out of tech stocks.
Ken Kam: Last week you moved away from tech stocks with a recommendation for AES, an energy stock. Do you think its time to get out of tech stocks?
Wayne Himelsein: No, not at all. I previously discussed the benefits (and risks) of diversification, and to do so, started high level, noting the differentiated price behavior across large scale sectors. Technology and energy are two of the most disparate sectors; both in conceptual contribution to our economy and in trading characteristics. I thus recommend some energy exposure, but at the same time, it is crucial to have core exposure to technology.
On top of sector diversification, there are benefits and risks to diversifying within a single sector. The risks of diversification at the “micro” level are similar to what I discussed at the “macro” level; that picking an inferior position in aiming to diversify can lower the quality of a portfolio. In portfolio-land, we give up conviction for breadth.