US Markets Risk

chiang_mai

The link below is the closest I have found to anything like an evidence based, independent accademic assement of whether Tech sector is a bubble or not…..a summary of some of the conclusions follow:

https://cepr.org/voxeu/columns/unpacking-us-tech-valuations-agnostic-assessment

"the earnings growth rates required to justify current prices do not appear implausible given the underlying

drivers of recent and expected performance.

However, some cautions are in order. Some industries still struggle to identify reliable applications, sparking short-term disillusionment. This could temporarily curb corporate AI spending and drive a re-pricing of technology stocks (The Economist 2025b). Added to this, intensifying competition, particularly from China, threatens to erode big tech’s profit margins (Mims 2025). These factors could make the realisation of the growth rates implied by our model less certain".

In summary, they don't know either but their approach and the study is interesting!

Linton

ISTM the important question in constructing a portfolio is not whether an event that could seriously reduce the value of investments vital for one's future well-being will happen,. The future is inknown, there is no net gain to be made from trying to predict it.

What is important is whether an event could reasonably happen without implying far more serious consequences that would make the effect on ones portfolio irrelevent. The solution is wide diversification to limit the impact of any single event.

Currently we have the US at say 65% of the world investable market capitalisation suffering serious global competition from China in both manufacturing and technology. The latter represents about 35% of the 65%. The highest valued stock, Nvidia, is dependent on supplying its currently unique products to a small number of closely correlated customers who are investing $billions of their and other people's money building data centres that could be obsolete in a few year's time.

The history of IT shows that many of the innovators fail to live long enough to justify the early expectations and development costs as their products become commodities and their services become utilities. Ultimately it is the effective users who win.

So there are serious possibilities that need to be considered. It may all work out. Who knows? Either way, for me, being retired with my future well-being potentially dependent on my investments, the US technology sector is too much unnecessary risk for a high proportion of my money.

.

chiang_mai

https://forums.moneysavingexpert.com/discussion/comment/82025243#Comment_82025243

I cannot disagree with any part of what you wrote although it does raise more questions.

Yes of course, we should not focus on whether it is or is not, nor on whether it will or will not. Diversification is the key but how much is enough, what types are the right type and at what point does diversification cease to be useful and instead merely a drag on performance….wasn't that what they used to say about 60/40?

The solution for a 25 year old will be different from that of a 65 year old. The 25 year old with 60% in global equities trackers may feel that 70% US and 30% other, is sufficent diversification and that 35/40/45% Tech Sector is part of the game. This 76 year old believes similar to you that 50% invested in global equities with 32% in the US and 18% Tech Sector is about right. Everyone else is likely to be somewhere in between.

As if investing wasn't already difficult enough. Before we started we had to decide our risk tolerance levels and a whole host of other difficult issues, then this comes along, which means we have to revisit those earlier decions and potentially rethink them all yet again! It's easy to understand why people bury their heads in the sand and hope for the best.

Perhaps the better course is not to debate Tech Sector/US concentrations but instead to do what we should all have done at the outset anyway, as you imply, diversify and structure our investments in such a way as to minimise the future fall out from Tech or whatever the current flavour might be. I for one like to feel that I've done that, I hope I have and I hope that others will. Whilst I don't know if bubbles will burst or not, I can guarantee there will be some serious leaks at some point.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82025306#Comment_82025306

Diversification between asset classes is very different to diversification within an asset class. Diversification between asset classes means that you are balancing the likelihood of high capital returns available from equity against the level of certainty provided by bonds (for example). In other posts I have suggested that an arbitrary 60/40 equity bond ratio is sub-optimal, but in some circumstances may be the best of a range of bad options. Better to base an allocation on liability matching where the appropriate asset classes are used for each of a set of different objectives,

If the efficient market hypothesis holds all sufficiently diverse pure equity allocations should provide much the same returns over the very long term no matter what the specific %s are. What adjusting the ratios can do is to change the level of short/medium term over and under performance by reducing the effect of localised systemic failures.

chiang_mai

https://forums.moneysavingexpert.com/discussion/comment/82025416#Comment_82025416

I think I mostly understand that difference. There can be no doubt that my equities are well diversified in every respect, geography, capitalisation, sectors, type and risk. Asset type diversification is a little more difficult. I hold gold, silver, fixed income and small amounts of REITS, but nothing in US Treasuries, outside what is contained in my FI or MA funds.I have explored using commodities but I haven't found anything yet that I could justify purchasing, either because of the volatile downside or because of potential for loss. At one point I did consider the likes of Capital Gearing Trust and Personal Asset Trust but any upside is sooo limited. All of that has left me holding 20% in cash, which may not be an alltogther bad thing, even though it doesn't provide downside protection, it just helps me sleep better. I've been attracted lately to Blackrocks Consesus 85 fund which is a fund of funds that contains a series of regional iShares trackers, including bonds and gilts. At 39% US and a MS risk rating of 50, it seems like a lower risk, diverse offering and a potential home for at least some cash. I think investing in diverse, low correlation assets, requires a change in mind set that I haven't yet acquired. I have to accept that buying those assets is protection and not become concerned because they appear to be non-performing assets and I'm not quite there yet.

kempiejon

In my SIPP I have separate ETFs for regions, Asia, Europe, USA and a few bits. I chose my own weightings but guided a global ex UK idea. I sold about half my S&P ETF beginning of this year, it had grown by more than the other regions reflecting the growth in the index of USA over the decade.

Since then I see it has risen another ~10%. My purpose for selling was psychological at least in part, nought wrong with taking a profit, over concentration of USA in the SIPP and aligned to that the discussed dominance of a growthy sector in that index. I used some of the funds to a couple of gilts as I'll be taking cash from the SIPP for the next few years.

Whether the USA or any other region is the majority traded globally is not a big driver to my style although the SIPP broadly follows a global theme. Since I set the SIPP up Asia is in 2nd place for growth.

chiang_mai

There's nothing wrong with taking profit, at least not in my world there isn't, but it does annoy the buy and hold brigade somewhat. I do so to rebalance, redirect and to avoid concentration.

Asia and EM have been my big earners this past year although Japan has come in a close second. Both can be volatile at times but have always recovered. I've paid little attention to the US, now that I've rejigged the way I hold US assets, it will be a case of buy and forget. Like you, I don't pay attention to which region is the most traded, instead, I let the perfomance of my managed funds dictate the pace, within my personal limits per region.

Whilst posting, I'll put up the following options for market weight versus equal weight S&P500. Apologies that it's an AI summary but there's lots of similar web articles on this subject that are easily found.

Map Your Allocation Strategy

Investment Profile	Market-Weight (e.g., SPY)	Equal-Weight (e.g., RSP)	Strategic Objective
Standard Core & Satellite	70%	30%	Blends mega-cap momentum with a value-tilted diversification safety valve.
The Concentrated Growth Bull	100%	0%	Maximizes exposure to Big Tech and AI leaders; accepts extreme top-heavy risk.
The Valuation Skeptic	50%	50%	Actively hedges against a major pullback or rotation out of mega-cap tech.
The Mean-Reversion Pure Play	0%	100%	Bets fully on the average stock outperforming top heavy weights over the next decade.