Would you buy Google shares now?

Tech Stocks: This is why these popular stocks can be dangerous

Apple, Amazon, Microsoft, Facebook and the Google parent Alphabet have presented sensational figures. Fortunately, because stocks are heavily overweighted in many portfolios. That can be a problem.

2021 got off to a fantastic start for the "Big Five": Whether Google parent Alphabet, Microsoft, Apple, Facebook or Amazon - all five major technology companies posted sensational profits in the first quarter. It was well received on the stock market.

Fortunately, because the "Big Five" are heavily overweighted in many portfolios. Investors are often not even aware of how much. This excess weight can become a problem: stock marketers call this a cluster risk.

The danger always lurks where individual companies, sectors or countries are comparatively high in the depot - and form a lump, so to speak. Because if these companies or industries get into trouble or the country is hit by an economic crisis, depots with a high level of concentration fall more heavily.

ETF investors have a lot of tech in their portfolio

Those who invest in ETFs own quite a chunk of technology stocks. This is because most of the indices the development of which ETFs track are composed according to market weighting. The companies that are worth the most on the stock market therefore have the largest share in the indices. And the most valuable companies in the world are called: Apple, Microsoft, Amazon and Alphabet. Facebook also makes it into the top ten.

The stock market expert
Jessica Schwarzer is a financial journalist, bestselling author and long-time observer of global stock markets. The German equity culture is a matter close to her heart. Her fifth book "So that she doesn't have to fish for a millionaire ..." was recently published. At t-online, she writes every two weeks about investments and financial trends that complement a broadly diversified basic investment. You can reach them on LinkedIn, Twitter, Facebook and Instagram.

In the S&P 500 alone, these stock market heavyweights have a share of around 20 percent. So when you buy the broad American stock market, you are investing quite heavily in technology. This is also shown by a look at the websites of the ETF providers. Example iShares Core S&P 500: Unsurprisingly, the largest positions are Apple with 5.94 percent, Microsoft with 5.41 percent and Amazon with 4.17 percent, followed by Alphabet with 3.93 percent and Facebook with 2.08 percent (as of : April 28).

In order to prevent your investments from being overly dependent on certain companies, sectors or countries, you should spread the risk of your investments widely. The idea behind it - scientifically proven by the Nobel laureate in economics, Harry Markowitz, by the way: If things are going badly at one company or in an industry, things will hopefully work much better elsewhere.

With diversification, as experts call this method, it is not only important to spread the risk over many individual stocks. You should also combine different asset classes that do not move in harmony; For example stocks and bonds, or gold.

Admittedly, this definition has now been greatly simplified, but the principle should have become clear. It is not for nothing that risk diversification is one of the most important basic rules for successful investments. The appropriate stock market wisdom is: Don't put all your eggs in one basket.

There is also an opportunity in the cluster risk

But back to our lump risk of technology: As always in life, every risk also harbors an opportunity. Although it would be going too far to speak of a "cluster opportunity", it doesn’t have to be bad to bet a little more on an industry.

In the case of the big tech companies, that has paid off. The industry is developing brilliantly. The stocks of the "Big Five" have led the stock market rally for years. Not least because of this, they are the most valuable companies in the world today. So it was even an advantage if you were heavily invested here.

The main thing is that you know what you are doing

As always with investments, it is important that we know what we are doing. That we know that a single industry is highly weighted in our index fund or that there are only a few companies that make up a fifth of the index.

A share of 20 percent is not really a problem, as there are completely different examples. However, if you also added an ETF on tech, then you would definitely be overdoing it. Example iShares Nasdaq 100: Apple is also the most highly weighted share there with a share of 11.30 percent, followed by Microsoft (9.66 percent) and Amazon (8.78 percent).

By the way: even if you invest globally, you have plenty of tech in your portfolio. Because the "Big Five" are also heavily weighted in the MSCI World share index. Although the index consists of more than 1,600 stocks from 23 industrialized countries, Apple and Microsoft each make up just over three percent of the index, followed by the usual suspects.

Not every ETF optimally diversifies the risk

These examples show how important it is for ETF investors to take a look at the composition of the index. Because not every ETF optimally spreads the risk. Of course, index funds are and will remain a good vehicle for spreading risk widely. But sometimes you scatter less than you might think.

The S&P 500, which is supposed to cover the broad American stock market, is a good example of this. It is particularly important to take a look at the indices for sectors or themed ETFs. They often contain only a few values, which are then weighted quite lavishly.

Of course, you won't have to memorize the composition of all the indices in the future. But a quick or perhaps a little longer look at the product information sheets or the ETF providers' pages is highly recommended. You will notice a strong overweighting of individual industries. And if you read the same top positions over and over again, you will notice that too. Then it is important to consciously make the decision for or against an index or an ETF.

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