I don’t think anyone should be afraid of owning big-cap tech because these companies are ingrained in our everyday lives and in our businesses. Try to do business without Nvidia chips or Microsoft software. The world needs big-cap tech—and so do the markets. And ultimately most portfolios.
The same holds true of the broader tech sector, which makes up the largest component of the S&P 500 by far, followed by health care and financials, according to Barron’s. I think of technology as the consumer staple of today, much like food and utilities. That’s why I think many Canadian investors need to own tech stocks—along with other sectors. It’s a balance.
How to decide which sectors to buy
I’m a bottom-up stock picker. That means I look at the value of a stock, while also making sure I have holdings in different sectors to minimize the risk of, as the saying goes, putting all my eggs in one basket. So, I don’t focus on specific sectors. Whether I’m looking for protection or growth, I want to make sure I’m getting good value.
For example, to build protection into a portfolio, I look for stocks that aren’t exciting to many day traders and may not have much short-term appreciation, but are secure and typically provide a 4% to 6% dividend, such as utilities and the banks. Of course, technology can also help protect a portfolio. During COVID-19, big-cap tech performed better than the banks.
To generate strong returns, I take a sector-agnostic, growth-at-a-reasonable price (or GARP) approach and look at price-per-earnings growth, as well as how the company is positioning for future growth.
It’s important for Canadian investors to remember that even the so-called “safe” investments come with some degree of risk. Even bonds, which by industry standards are viewed as low risk, will take a hit when interest rates go up sharply—and they did. Of course, with bonds, if you hold them to maturity, you’ll get your money back.
What to look for in the S&P 500
It cannot be said enough: Diversify, diversify, diversify, and let value (growth at a reasonable price) be your guide. And that also goes for when you consider all the stocks in the S&P 500, including tech.
In my opinion, a portfolio without tech risks missing out on growth.