Tech Stock Selloff Exposes Risks of Passive Investing
Financial advisors have been forced to scramble as the explosion of tech news whipsaws portfolios.
There’s nothing quite like a jolt of stock market volatility to remind investors why they should focus more on long-term objectives and less on daily price movements.
For many financial advisors, the tech-triggered market selloff this past Monday was an opportunity to calmly remind clients of their long-term goals while rolling out charts illustrating how volatility tends to smooth out over the longest of time horizons.
Still, when the broad market indexes dropped a few percentage points before lunch and some of the hottest stocks of the past few days fell double digits, one of the rudest awakenings for clients might have been how exposed they were to that kind of volatility.
While we’ve spent the past few years talking about the powerful influence of a handful of technology companies that have driven the markets to new heights, the flip side of that was exposed in full-throated glory on Monday.
Even financial advisors who dutifully allocate client assets across big, boring equity index ETFs had to be fielding questions about the wild ride.
Tech Sector Throws Its Weight Around
“What we’ve been telling clients is that this is why we build up emergency funds with short-term, low-risk, low-volatility investments,” said Leibel Sternbach, founder of Yields4Y, a Melville, New York-based financial planning firm.
Sean Beznicki, director of investments at VLP Financial Advice in Vienna, Virginia, used Monday’s volatility to remind clients of the importance of regular portfolio rebalancing.
“We stay disciplined during selloffs such as these; maintaining a calm approach and viewing them as excellent buying opportunities,” he said. “The best strategy remains to stay invested and diversified, ensuring long-term goals stay on track despite short-term market fluctuations.”
Excellent advice, for sure, but one can’t help but wonder how many clients were stunned to realize how much risk they were embracing in exchange for back-to-back returns in the 25% range from something as seemingly mundane as the SPDR S&P 500 ETF Trust (SPY).
Callie Cox, based in Charlotte, North Carolina as chief market strategist for Ritholtz Wealth Management, said she wants clients to enjoy “base hits over so many violent swings and home runs that you blow your shoulder out.”
“I’m hoping this moment encourages everyone to look beyond tech stocks,” she added. “Not because the AI story is doomed, but because there are so many opportunities in unloved sectors that have been ignored for so long.”
Ignored, perhaps, because they promise less pop or are just unable to find any room to breathe in portfolios loaded down with seemingly safe market cap-weighted indexes.