After a couple of days of profit-taking the US technology sector is again flying high pushing the NASDAQ and the Dow Jones industrial average to record intraday highs. This short bout of profit-taking seems to be over as tech stocks return to favour amongst investors. However, could it be time to switch at least some of your portfolio from tech stocks to defensive stocks?
Tech stocks fully valued?
On the face of the tech stocks may look fully valued but the US economy is starting to pick up speed and this will be reflected in the short to medium term trading for technology companies. So the valuations we see today will reduce in due course although in theory the markets could push higher which would increase ratings yet further. It is therefore debatable as to whether tech shares are fully valued but at this moment in time there would appear to be limited upside.
The very fact that we saw a few days of profit-taking in the technology sector would indicate that some investors have trigger-happy fingers when it comes to banking gains. Will we see another bout of profit-taking in the short term?
Looking at defensive stocks
Defensive stocks such as automobile companies and banks for example have not really contributed to the recent rise in the NASDAQ and the Dow Jones industrial average. They have been overtaken by the tech companies but there is still some good value in defensive stocks which offer relatively low ratings and better than average dividend yields. The word defensive would suggest that the stocks are “boring” but that is not always the case because undervalued defensive stocks will have their day when markets begin to wobble and highly rated technology shares succumbed to gravity.
As a consequence, it may well be time to start switching part of your portfolio from highly rated technology shares to some of the good old fashioned defensive stocks. This should help to balance your portfolio going forward and at least protect you from some downside if markets were to fall sharply. It is all good and well being fully invested into technology shares when the sector is doing well but what happens when ratings come back down to earth?
Sensible investing
Defensive stocks are overlooked when markets are flying high and technology shares are trading on unbelievable ratings. The fact is that defensive stocks offer the potential for long-term capital growth as well as above-average dividend income. These are not fly by night companies but some of the best-known automobile companies and banks for example. They may not outperform technology shares in the sprint to the line but like the hare and the tortoise it is not necessarily that initial burst of pace which gets you over the finishing line in the long term.
At the end of the day you will never pick the top or the bottom of any sector therefore once you believe your technology shares are moving into an “overvalued” situation it may be time to start switching part of your portfolio – on the way up. You don’t have to sell all of your technology shares and switch into defensive stocks in one go. Instead take a slowly but surely approach and take advantage of market rises to take a profit on your technology shares and reinvest into some good old-fashioned defensive stocks.