A Wall Street strategist explains how much tech you should have in your portfolio

Tech stocks have been one of the stock market's best bets throughout the nine-year bull run, but investors should still be prudent in terms of how much exposure they own.
Kate Warne, investment strategist at Edwards Jones, lays out some best practices for how much tech traders should have in their portfolios.

Believe it or not, there's such thing as owning too much tech.

The mere notion may seem outlandish, considering the industry's staggering outperformance over the nine-year bull market. And it feels even more far-fetched when you consider tech's index-leading role throughout 2017 and into 2018.

But Kate Warne, investment strategist at Edwards Jones, says this is precisely when tech investors should be watching their backs.

In fact, she has a tried and true set of rules that stock traders would be well-served to heed. They are as follows:

1) Don't hold more than 20% of your overall portfolio in tech stocks

2) Don't hold more than 5% of your overall portfolio in a single stock

"This isn't because we don't like tech," Warne said in an interview at Business Insider's office. "It’s because any time a sector has gone above 20%, something has happened to undermine it."

Warne's rationale is simple enough: Investing with this degree of discipline and diversification avoids an "all eggs in one basket" scenario. When things go south — and they will, one day — it's better to be safe than sorry, even if it means sacrificing some short-term upside.

"It's exactly the time when everything seems to be going right that you want to make sure you don't have too much exposure, because of Black Swan-type events," said Warne. "You could still get hurt, but you won’t be so overexposed that you can’t recover from an unexpected event."

If you're looking at those thresholds and thinking they're impossibly high, consider that tech stocks — particularly the biggest, most heavily-weighted ones — have become among the most crowded positions in the entire equity market.

While that can create an "everyone gets rich" scenario during fruitful times for the tech sector, it also exacerbates moves to the downside. That's because when a crowded trade starts to crumble, everyone tries to get out simultaneously, creating a further logjam of selling pressure.

"We're not saying get out, or that this is a bad strategy," said Warne. "We're just saying make sure you’re never so invested in a particular place that when everyone runs for the exits, you can’t recover. You’ll be charred at the edges, but you’re still alive."

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