Tech stocks had a decade of soaring returns capped off by a jaw-dropping 2020. But in recent months, the sector has undergone a bit of a correction.
Whether it's a short-term blip or a longer-term phenomenon has yet to be seen. Worried the sell-off will continue? Here's what to do if you're worried about an ongoing correction.
1. Divide your tech stocks into two categories
The first thing to do is reevaluate each tech stock you own and think back to why they originally deserved a place in your investment portfolio. If nothing has fundamentally changed, you still think the company has strong long-term potential, and you don't have pressing cash needs, put it on your hold list.
But if there's been a key change -- say, the company is being acquired or you think its growth days have passed -- it may be time to sell your shares. For each company you list among your potential sells, be sure your decision is based on the strengths and weaknesses of the company, rather than panic about where the tech sector is heading.
2. Set aside cash for stocks you want to own
If you think the correction is just beginning, why not capitalize? Start setting aside cash for tech stocks you want to own but are still a bit pricey for your tastes. Don't try to time the market and wait for shares to reach rock bottom, though.
Decide what you're comfortable paying for each company. If shares fall below the price point you've set, buy. Don't worry about shares temporarily dropping further if you believe you're buying a good business.
3. Avoid overdiversifying
If S&P 500 index funds or total stock market index funds make up the backbone of your investment portfolio, you're already pretty well diversified. So don't worry too much about owning a lot of tech stocks within your individual holdings if you think they're solid businesses.
There's a risk that comes with overdiversification, which basically means you spread your portfolio so thin that you can't focus on your high-conviction holdings. Often, you wind up reducing your returns without significantly reducing your risk.
4. Grab some dividend-paying stocks
Tech stocks aren't exactly known for their dividend payments. Most technology companies use their excess cash to fuel growth rather than reward faithful shareholders.
But if you're expecting the correction to continue and you plan to sell some of your shares, loading up on some dividend stocks can be a nice consolation prize. While you won't get the huge gains you've gotten from tech stocks in recent years, getting dividends that you can reinvest to buy even more shares is a solid plan B.
5. Base decisions on the next decade
As most of the world prepares to reopen, a continued sell-off is inevitable for many tech stocks. That doesn't mean there's anything fundamentally wrong with many of these businesses.
Stay-at-home stocks had an unbelievable run-up last year. It was a given that they'd come back to earth somewhat once people could start resuming their prepandemic routines. Other shorter-term factors, like a global chip shortage, could spell tough times in the next few months for tech companies that make consumer-facing products.
But these factors shouldn't bother you if you're a long-term investor. Make your decisions about where you see a company a decade from now. When you have a true conviction holding, a short-term correction is nothing to fear.