What Should You Do About the Dominance of Large Cap Growth in Your Portfolio?

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September 25, 2020

What Should You Do About the Dominance of Large Cap Growth in Your Portfolio?

The dominance of large growth companies these past 10 years is no secret. Every day we listen to reports about Facebook, Amazon, Apple, NVIDIA, Netflix, Google, and Microsoft. But to truly appreciate their dominance in the stock market, one needs only to look at the graph below that illustrates the outperformance of Growth vs Value. The higher up on the graph, the more the outperformance of large growth companies. Today’s outperformance dwarfs the early 2000s and the 2008/9 Great Financial Crisis.

Since 1995, the outperformance of growth over value has never been higher.

S&P 500 Growth Value

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Source: Bloomberrg

Now that you’ve looked at the pretty graph, what should you do about it?

For starters, if you have the majority of your investments in large cap growth, it may be time to consult with your professional advisor about taking some profits. It may be time to diversify your portfolio of stocks, ETFs, and mutual funds. And if you hold an index or ETF that tracks the S&P 500®, then you should probably pay even closer attention to my next point because the seven sectors that make up the S&P 500® are, in my opinion, highly skewed.

In 2018, the technology sector and financial sectors EACH made up 20% of the S&P 500®.

Today, the technology sector makes up almost 30% of the S&P 500®.

The financial AND energy sector TOGETHER only make up 12.2% of the S&P 500®.

Just stop and think about that for a moment and tell me we may have overbought technology stocks and stacked too much of our future capital into one sector. (Source: The Bear Traps Report from 9/23/2020.)

This is why, in my opinion, the large cap growth stocks and technology stocks are due for a rebalancing. In my opinion, what’s driving this rebalancing is the work from home shift due to Covid, the insatiable appetite of passive indexing funds, cheap financing of debt for these large companies, and the pervasive nature with which we are all consumed by technology.

The stock market ebbs and flows from sector to sector. It’s just what it does. Our expectation over the next 12-24 months is investors will continue to sell the large cap growth and technology sectors and reposition their money into real assets like mining, materials, and commodities; infrastructure stocks, home building, large cap value, real estate, agriculture, and energy sectors.

Take a good hard look at your portfolio and spend some time doing a deep dive into exactly what you own INSIDE of each of the ETFs and Mutual Funds and Index Funds that you own. Chances are, you own a lot more of technology and large cap growth than you thought you did.

And if you don’t want to do this yourself, or if you want a second opinion, please call us at 913-653-8783. We would love nothing more than to do the wonderful work we’ve been called to do and share our opinion regarding your portfolio. All it would cost is your time. Come and enjoy our friendly conversation over a cup of coffee. 😊