How To Diversify When There’s Sectoral Domination In The US?

If you recall the US share market headlines that dominated the front pages in late 2023, you’d come across one term quite frequently—tech. Interestingly, more than six months later, things haven’t changed much. Technology seems to have become an evergreen sector dominating the US market shares. For most people, this might not seem important, but investors know the chaos this complexity can cause.

What’s the issue?

Diversification is an important aspect of stock portfolio risk management in the context of US stock investing. However, with the increasing domination of high-value tech stocks, diversification seems to be becoming a little difficult to implement. With a significant portion of value concentrated in a handful of large tech companies, portfolios become more vulnerable to sector-specific downturns.

So, how can investors tackle this?

1. Consider Bonds and other alternatives: 

Investors may consider many other investment products to diversify their portfolio, such as bonds and commodities. Both of these instruments have distinct upsides and downsides, but they share a trait of low correlation with the overall stock market. This means that they’re good at reducing the overall risk in a tech-dominated stock portfolio. In the face of market volatility, bonds and commodities can act as shock absorbers. 

2. Add size diversification:

Sometimes, it may be possible for investors to diversify their portfolio without actually deviating from US Tech stocks. One method is size diversification. For instance, let’s assume that large-cap Tech stocks dominate an investor’s stock portfolio. In this case, investors can consider exploring other types of stocks, such as mid-cap and low-cap. Investing in low-cap stocks can allow investors to be at the forefront of the latest developments in the world. Likewise, the example could be reversed. 

3. Consider long-term trends:

Global events are big trendsetters in the US share market, which explains why the tech sector has blossomed in recent years after the Covid-19 pandemic. If there’s anything to take away from that statement, it is that tough situations may trigger the development of trends. However, a lot of trends are actually short-lived, especially if they have emerged rapidly. The influence of Tech stocks could be a trend, too, perhaps even a short-lived one. To counteract the aftermath of this sector losing strength, investors should explore other sectors that will always be relevant. For example, renewable energy, healthcare, and infrastructure are some of the sectors that are likely to keep their footing firm in the world. Thus, investing in the instruments of this sector can help balance the volatility in a portfolio dense in Tech stocks.

To conclude, considering diversification can be challenging when only one sector dominates the markets. But reducing risks is also important. Therefore, investors should consider alternative investments to balance their portfolios. Investors could use a US stock market app like Appreciate to explore what investment options are available in the US and how they can help mitigate risks associated with stock market volatility. With the right app like Appreciate, diversification doesn’t have to be rocket science.