Key Points
A rotation is not an automatic signal to sell your holdings.
Consider trimming your position if tech has grown beyond your target allocation.
It's possible to systematically restore balance to your portfolio without making predictions about the market.
During the week ended Oct. 14, U.S. tech funds recorded roughly $5.21 billion in net outflows. Given that U.S. equity funds pulled in $13.01 billion around the same time, it may be that everyday investors are reallocating holdings rather than abandoning equities altogether.
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Debt, insufficient earnings, and valuation
Primary concerns surrounding tech exchange-traded funds vary by investor, but the use of debt to finance artificial intelligence (AI) infrastructure appears to be one cause of concern. Higher borrowing costs put pressure on tech companies' profits and make growth stocks less attractive because future earnings are discounted at higher interest rates.
In addition, investors may worry that AI infrastructure spending could ultimately cost more than the economic value it produces.
Valuation is another concern. Tech companies have delivered dramatic growth over time. Still, if investors are disappointed by revenue growth, margins, or capital returns, even the most highly valued stocks can fall sharply, regardless of how fundamentally sound their business remains.
Why selling everything may still be a mistake
Despite legitimate concerns, this rotation doesn't prove technology's long-term prospects have ended. It's hard to imagine the future (near or long-term) without AI playing a role.
AI isn't the only thing tech companies have to offer. Cybersecurity, semiconductor, cloud computing, software, and hardware companies each have different business models. These companies also have different balance sheets, valuation risks, and years in business. Selling an entire tech allocation because you're nervous about one sector may lead to sacrificing profitable businesses as well as more speculative holdings.
How to decide whether you should remain invested
The primary question is whether pulling back right now is in your best interest. In part, it depends on where you are in life.
Consider reducing your exposure in tech funds if:
- A tech decline would prevent you from meeting an important financial goal, like preparing for retirement.
- A few technology stocks dominate your portfolio.
- You need the money within a few years and want to move a portion of your tech investments into less volatile investments.
- You invested in tech mainly because of enthusiasm for AI or recent price gains.
Consider remaining invested in tech funds if:
- You have a balanced portfolio, with technology making up a balanced portion rather than a large concentration.
- Your holdings are diversified across profitable businesses, subsectors, and regions.
- You can handle substantial short-term declines without selling.
- You have a long investment horizon and won't need the money soon.
Ideally, neither buying nor selling should be driven by adrenaline or media hype. Before deciding, review each holding to see whether it still fits your goals and risk tolerance. If you decide to reduce tech holdings, gradual rebalancing can help you diversify without requiring you to predict the market's next big move.
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