It seems like a great plan. The technology sector has absolutely crushed it over the past decade. The names are familiar: Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia. Their products are everywhere, their profits are astronomical, and their stock charts look like ski slopes turned upside down. Why not just invest in these giants and call it a day? What could possibly go wrong?
Well, history has a few cautionary tales for us.
The Illusion of Permanence
First, let's talk about sector performance by decade, starting from the 1900s. A study from Jeremy Siegel's book "Stocks for the Long Run" provides a comprehensive view, and below were the market winners from each decade:
- 1900s: Railroads and utilities.
- 1910s: Industrial and utilities.
- 1920s: Autos and consumer goods.
- 1930s: Utilities and consumer staples.
- 1940s: Industrials and energy.
- 1950s: Consumer goods and manufacturing.
- 1960s: Conglomerates and blue chips.
- 1970s: Energy and commodities.
- 1980s: Consumer goods and pharmaceuticals.
- 1990s: Technology and financials.
- 2000s: Energy and materials.
- 2010s: Technology and consumer discretionary.
What's clear from this historical pattern is that the winning sectors of one decade rarely dominate the next. Investing based on past sector winners is a strategy that has repeatedly failed. Research from the Journal of Portfolio Management shows that "hot" sectors often revert to the mean, and chasing past performance can erode returns over time.
The Creative Destruction of Capitalism
Capitalism is ruthless in its dynamism. The economist Joseph Schumpeter called it "creative destruction" — the process by which innovation deconstructs long-standing arrangements and frees resources to be deployed elsewhere. In the 1960s, the original Dow 30 included names like Eastman Kodak, Sears, and Bethlehem Steel. All have either disappeared or drastically declined.
Only a few companies have managed to stay at the top for multiple decades. McKinsey & Company found that the average lifespan of a company in the S&P 500 has decreased from 61 years in 1958 to less than 18 years today. Dominance today does not guarantee relevance tomorrow.
Valuation Risk
Mega cap tech companies are priced for perfection, with the average price-to-earnings (P/E) ratios significantly above overall public market averages. A high P/E ratio indicates that investors are willing to pay a premium today for a company's earnings. This typically reflects a belief that the company will experience sustained, strong earnings growth in the future. If the expected growth does not materialize, those high valuations can quickly become unsustainable, leading to price corrections; consequently, high P/E stocks are often more sensitive to changes in growth outlook or earnings disappointments. One great example – in 2000, Cisco Systems was one of the most valuable companies in the world, riding the wave of the dot-com boom with a sky-high valuation. After the bubble burst, its stock collapsed—falling nearly 90% from its peak—and despite remaining a solid tech company, it took over 15 years to approach those highs again.
The Risk of Concentration
Investing solely in mega cap tech also means missing entire sectors — healthcare innovation, industrial automation, renewable energy, and more. The S&P 500 has become increasingly concentrated, with the top 10 companies contributing over 90% of the index's gains in some years. According to a 2021 study by Hendrik Bessembinder, only 4% of all U.S. stocks account for the entire net gain in the stock market over the past century. This concentration risk means that betting on a few big names exposes you to outsized downside if these stocks are not a part of the select few that significantly outperform over the time period.
Conclusion: A Lot Can Go Wrong
On the surface, investing only in mega cap tech companies seems like a rational response to recent performance. But history, data, and economic theory suggest otherwise. Markets evolve, winners change, and valuations matter. Diversification may seem boring, but it is a proven way to navigate uncertainty. Betting it all on today's giants is not just risky – it's ignoring what we know about how markets work.