Portfolio Dilemma: have my tech winners become too big?

Keith asks: My technology holdings have significantly outperformed my other investments over the past five years and now make up a large part of my portfolio. I don't want to miss out on further gains, but have they become too big?

Technology investors have enjoyed an extraordinary run over the past couple of years. Whether you've backed the Magnificent Seven, owned a technology fund or investment trust, or simply gained exposure through a global index fund or ETF, there's a good chance those holdings now make up a much larger proportion of your portfolio than they did originally.

On the one hand, no one likes to sell winners too soon, particularly when the long-term investment case remains intact. In technology, investors continue to be excited by trends such as artificial intelligence (AI), cloud computing and digital transformation.

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However, there's a difference between owning a winning investment and allowing a single sector or theme to become so dominant that it increases risk levels beyond what you initially intended.

As I've covered before, reviewing a portfolio is a bit like tackling household chores. It is not exciting, but it is necessary. A portfolio left untouched during a strong market rally can end up looking very different from the one originally constructed.

That's where rebalancing comes in. In simple terms, it involves taking some profits from the parts of your portfolio that have performed strongly and reinvesting elsewhere. Often, that means trimming exposure to areas that have surged in value and adding to parts of the market that have lagged behind.

A key question to ask yourself is not whether your technology holdings have performed well in the past. Instead, ask whether you are comfortable with the level of risk they represent today.

As Richard Hunter, head of markets at interactive investor, pointed out in an On The Money podcast episode on how to decide whether to take profits or run a winner, investors should avoid the trap of "falling in love" with investments that have served them well.

He argued that investors need to assess every holding "with the same cold eyes that you did when you bought it".

Hunter noted that when a holding has grown well beyond its original weighting, investors could consider reducing it back to its intended portfolio allocation while still maintaining meaningful exposure to future growth.

He said: "Let's imagine you bought £10,000 worth of shares and you absolutely got it right and the share price went so high that your investment is now worth £20,000, so you've doubled your money.

"Top slicing would involve selling £10,000 worth of those shares, so your original investment is covered. You've now broken even. The remaining £10,000, a) leaves you with skin in the game, and b) is pure profit."

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Rebalancing is not just about managing concentration risk. It is also worth considering whether expectations for the sector remain realistic.

One of the biggest debates occupying investors today is whether the enormous sums being spent on AI infrastructure and development will ultimately generate the earnings growth and profits the market is expecting.

As Ben Whitmore, manager of the TM Brickwood Global Value and TM Brickwood UK Value funds, pointed out when he appeared on our On The Money podcast, the scale of AI-related investment is remarkable by historical standards.

He said: "It has exceeded cars and railways and all the other things that have transformed people's lives. The scale of the investment is exceptionally high in relation to history.

"We don't know the answers really to the returns on AI investment, but what we do know is that on average, low valuation is where we want to concentrate, not high valuation."

That does not mean investors should avoid technology altogether. However, it may be sensible to balance exposure to the winners of the AI boom with investments in other sectors and styles that have been left behind.

It's also worth remembering that many investors have more technology exposure than they realise. Even those who do not own a dedicated technology fund can have significant exposure through global equity funds, US equity funds and tracker funds that follow indices such as the S&P 500 or MSCI World.

Ultimately, there is no magic percentage at which technology exposure becomes too high. However, when one sector or theme comes to dominate a portfolio, it can weaken one of the most important risk-management tools investors have: diversification.

Taking some profits does not mean giving up on the long-term potential of technology. Instead, it is about making sure that one successful part of your portfolio does not end up determining your overall investment outcome.