Watch out for dogs among the hedges
Many people imagine that when the market is high, as it is today, they can keep themselves safe from losses (big losses, anyway) by pulling money out of small caps, biotechnology, internet technology, alternate energy, and all the other volatile and dangerous (not to mention fun) market sectors. Some investors take vibrant, exciting portfolios and pair them all the way down to a handful of Dow 30 stocks (the Dogs of the Dow, perhaps), Berkshire Hathaway (BRK.A), and maybe one big tech company like Apple (AAPL), since we’re all tech savvy nowadays.
Unfortunately, the above strategy has never worked particularly well. When corrections come, big companies tend to lose the same percentage of value as the overall market. The variance is higher in smaller and more volatile companies, so about half the time, holding them will be even worse, but that won’t make sitting through a 50% downturn (as so many of us have done twice already) any more palatable. Another problem is that until the 2014 energy crash, an unusual and disproportionately high percentage of the market’s rise in value was coming from its largest companies. In many sectors other than energy, this is still the case. It follows that in the current market, it is big companies, not small ones, that are most likely to be overbought and overpriced.