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We always tell investors that they need to have a diversified portfolio of uncorrelated investments to reduce losses in a major downturn. The stock market has been on a tear since 2022, driven primarily by a booming tech sector. We have seen this before. We saw telecom and internet stocks drive the market higher in the late 1990s and early 2000s, leading to a sudden crash that wiped out 40% of investors’ equity. Is artificial intelligence the new telecom and internet bubble about to burst? |
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The above chart shows what percentage the technology sector represented in the S&P 500 by year. In most years it ranged from 10-17%. In the late 1990s, the telecom and internet stocks took off, resulting in the sector representing an astounding 35% of the total valuation. Then, in the blink of an eye, the market crashed and stayed depressed for several years. Some equity analysts are now looking at the current technology run with skepticism and caution. The tech sector currently trades at 32X forward earnings estimates, which is very high. What is more troubling is that to hit this aggressive estimate, earnings need to grow at 30% year-over-year when they have averaged only 20% recently. The sector is priced for perfection, and if analyst sentiment shifts, some believe it could lead to a repeat of 2000. We are bringing this up to reinforce the importance of having a diversified portfolio of equities, bonds, cash, alternative assets and real estate. We wouldn’t suggest anyone have all their assets in multifamily, but it is important to have a meaningful exposure to the asset class due to the uncorrelated nature of the investment and the long-term, strong risk adjusted returns. We also think it is the best asset class in commercial real estate, because at the end of the day, people must live somewhere, though in some cases, you can get by without an office, a storage unit, another store front or a hotel room. |
