How to Remove Tech Risk from your Portfolio

One of the best things you can do financially is to set up an automatic purchase of a broad-based stock index. For many people, it’s a mutual fund that mirrors the S&P 500. You can set this up with companies that charge very low investing fees such as Vanguard, Fidelity, and Schwab.

The above is probably the least controversial advice in the world of personal finance. If I wanted to live up to my Lazy brand, I simply just point you to that above paragraph and end the article.

For decades and decades investing in the S&P 500 has been a safe long-term investment. I’m not going to argue that is going to change (at least not today). However, I think there’s more danger in the S&P 500 than there’s been in a long time.

It has become very focused on technology. The top 5 holdings are Apple, Microsoft, Amazon, Facebook, and Google. Over the last 6 months, these companies have done very well because we’ve been home using all their services. Other companies have not done as well. Without people driving or flying oil demand has dropped. On average, the S&P 500 has done well. Apple spent decades in a race to become the first trillion-dollar company… and in 2 years it was a 2 trillion-dollar company.

I love technology. However, it looks like the tech bubble of 2001 to me. It’s very different because there are real profits from these companies, but the growth of already huge companies is unusual and in my opinion, unsustainable.

What about the Wilshire 5000

You may think that the Wilshire 5000, with thousands of companies, would be better diversified. It is, but only barely. If you were to invest in Vanguard’s ETF that mirrors it (Symbol: VTI), you would see that the top 5 holdings are the same as the S&P 500. I don’t see the specific holding percentages, but the top 10 stocks comprise 23.90% of the index. I think it’s reasonable to presume that the top 5 are about 13%*.

Essentially you have a similar problem with the big companies at the top and them all being large technology companies. These large companies tend to move the same way. It’s great (for their bottom line) if there’s a pandemic and everyone needs to use them for basic needs. It’s bad news if the government follows through on their threats to regulate them.

I’m not saying that you should remove tech risk from your portfolio, but it is something that you should at least consider. If you decide that is something you want to do, then…

How to Remove Tech Risk from your Portfolio

One of my resolutions at the beginning of 2020 was to reduce my stock market risk. We had just had a great decade of growth and I’m at the point in life where it is more important to me to be defensive.

I explained that I sold off 40% of my VTI stock and bought iShare’s high dividend ETF (Symbol: HDV). HDV has a bunch of boring companies that pay consistently high dividends. You won’t find Google in it, but you will find AT&T, Exxon, Johnson & Johnson, and Coca-cola. It currently pays a strong yield of over 4%.

You’ll find all of the HDV companies in the VTI that I sold off. However, because there’s a larger concentration of health care, energy, communication, and consumer staples the combination of a VTI/HDV split is more balanced.

How is this plan working?

I have to be honest with you. It’s been a roller coaster. As I mentioned in the beginning, oil has not done well during the pandemic. Oil companies tend to pay high dividends. The nature of this pandemic didn’t work in the favor of HDV vs. the tech-heavy VTI.

However, in the last week or so, people have started to sell off technology stocks. They seem to agree that it is a bubble that has grown too fast. That’s brought VTI down 6-7%. Meanwhile, HDV was only down a little bit. This is exactly what I wanted my HDV holdings to do. When there’s a big tech sell-off HDV holds most of its value.

There are still a lot of companies that haven’t recovered from the COVID shutdown. I like to think that we’ll get a vaccine and things will return to normal within the next year. (I don’t want to think about it taking longer, but from an investing perspective that wouldn’t change my mind.) When that happens, many companies should start to recover and HDV should outpace the market.

Other Ways to Remove Tech Risk from your Portfolio

There are countless other ways to remove tech risk from your portfolio. You could buy more bonds. You could hold cash. You could invest in real estate. You could invest in cousin Fred’s pinecone hairbrush company.

I settled on HDV because it is a US-based stock market index. The money that I allocated to investing in US companies is still the same. That means that I don’t have to call up cousin Fred and tell him that his funding for his hairbrushes has gone away. I also like HDV’s high dividend income even if I’m reinvesting it now. Maybe in the future, I’ll live off of those dividends.