HOW VULNERABLE IS YOUR 401(K) TO ‘ TECHLASH’?
You might be feeling a lot of financial pain — and not even know it
Even if you don’t own individual shares of Facebook, the falling stock might not be a friend to your 401(k).
Indeed, the “techlash” and share price free fall that have recently engulfed popular tech companies such as Facebook, Amazon, Netflix and Tesla might be causing you financial pain — without you even knowing it.
The reason: You likely hold tech stocks in your retirement portfolio through index funds — and a lot more than you might think.
There has been a major shift in retirement investing away from individual stocks and toward so-called “passive funds,” or low-cost funds that track major stock indexes such as the Standard & Poor’s 500. And right now, thanks largely to the information technology group’s nearly 37% gain last year, tech accounts for roughly a quarter of that index, which is by far the biggest industry group represented.
That means investors in these funds have 25% of their money riding on the fortunes of smartphone makers, social media companies, online retailers, video streaming services, electriccar manufacturers and software providers for self-driving cars.
“There is definitely a lot more tech exposure in peoples’ portfolios than they might realize,” says Ken Mahoney, CEO and financial adviser at Mahoney Asset Management in Chestnut Ridge, N.Y.
And when these stocks are rallying, like they have been for the past year, it is the equivalent of investors reallocating more money toward tech without knowing it, Mahoney adds. They end up having more of their cash invested in tech, which means more risk when prices decline.
Roughly $2.2 trillion is invested in funds that track the S&P 500, according to S&P Dow Jones Indices. And nearly half (44.3%) of all fund assets are now in index funds, according to Strategas Research Partners.
This is good to know, considering prices of the most popular tech stocks have suffered steep falls this month on fears ranging from a coming regulatory crackdown to technical mishaps involving autonomous cars to heightened investor anxiety over the future outlook for cutting-edge tech companies.
A wave of bad news has turned investors’ ebullient optimism regarding life-changing technology stocks to wary skepticism.
Facebook’s data privacy crisis, for example, has boosted the odds of coming regulation for social media companies, a potential obstacle to company profits that could also ensnare Twitter and Google parent Alphabet’s ad search business.
Amazon shares have also come under political fire amid an Axios report Wednesday that suggests President Trump is looking for ways to curtail the online seller’s power in an effort to help mom-and-pop retailers. Trump weighed in on Twitter Thursday.
Similarly, shares of Tesla have taken a hit as National Transportation Safety Board investigators try to determine if a deadly California crash of a Model X vehicle involved the company’s Autopilot system. “It’s a perfect storm,” Mahoney says.
The negative headlines along with worries about a possible trade war between the U.S. and China have caused massive damage to the stocks.
Facebook shares have fallen more than 17%, and the company’s market value has been reduced by nearly
$77 billion since its privacy data scandal began.
Amazon shares cratered 4.4% Wednesday and are down 10.4% from its recent high on March 12. Twitter shares — down 22% since their March
14 peak — plunged 12% Tuesday when a Wall Street analyst said it was the social media stock most exposed to regulatory risk in the wake of Facebook’s data privacy scandal.
Similarly, Tesla fell nearly 8% Wednesday on news of the crash in- vestigation and a credit downgrade from a Wall Street bond-rating agency, which erased roughly $3.6 billion of its market value.
Since March 16, the last close before the Facebook scandal hit, the S&P 500 has lost 5.3%, with tech responsible for a sizable chunk of the fall.
“These behemoths are now being viewed more skeptically,” Jason Trennert, managing partner of Strategas Research Partners in New York, told clients in a report that looked at the dangers of “over-concentration” of tech stocks in index funds.
It is the high concentration of tech stocks in funds that track the S&P 500 that puts investors at risk. The large-company index is weighted by the stocks’ market values, which means companies valued in the hundreds of billions, such as Apple and Facebook, have a bigger influence on the price movement of the overall index.
These funds, therefore, are “fully exposing investors to an increasingly small group of stocks,” Trennert says.
What’s more, so many people, traders and funds have so much money invested in tech that it has become one of Wall Street’s “most crowded” trades, shorthand for everyone pretty much betting on the same thing.
And when uncertainty about tech stocks’ profit prospects spikes, money comes out of the stocks as fast — if not faster — than it came in, Mahoney warns.
“Tech has become a big driver of our economy and a big driver of our day-today lives,” Mahoney says. “You will see the big tech stocks in the top-10 holdings of funds, in a lot of index mutual funds and hedge funds. So when traders yell ‘exit,’ they all have to sell the same types of stocks.”