A trader works on the floor of the New York Stock Exchange (NYSE) on April 4, 2025 in New York City.
Timothy A. Clary | Afp | Getty Images
Many investors remain fascinated by the so-called “Mag 7” and the technology-oriented US stock market. A history lesson might be in order so they aren’t hampered by the mistakes that ruined portfolios in the early 2000s.
Although there are differences in today’s market, the period we are in is similar in some important ways to the period before the dot-com bubble burst. During the dot-com heyday, many market participants focused too much on the technology sector and ended up losing big.
“People get caught up in the hype,” said Seth Hickle, chief investment officer at Mindset Wealth Management in Indianapolis, Indiana. Many investors bought into the technology sector after huge gains had already been made, ignoring valuations and overestimating their risk tolerance until volatility showed up in their portfolio, Hickle said.
The warnings are raised every day. JPMorgan CEO Jamie Dimon told CNBC’s Wilfred Frost on Monday that he wouldn’t buy stocks at those valuations. (Dimon said he wouldn’t buy long-term Treasury bonds either.) Warren Buffett recently told CNBC’s Becky Quick, “It’s hard to find value when everyone prefers gambling.”
Financial advisors say the first step is to have a strategy — and realize that chasing profits isn’t part of it. Many investors were happy with the latter during the dot-com years. Before investing, an investment strategy must be established, which must include a plan for withdrawing some of your chips. “To mitigate bad, emotion-based decisions, you need to know what you’re buying, why and when it makes sense to get out,” said Dan Sudit, partner at Crewe Advisors in Salt Lake City.
Financial advisors warn that investors tend to repeat the mistakes of the past. Technology is central to the stock market and will continue to play an important role in long-term growth. However, there are ways to connect with technology leaders without repeating the mistakes of the dot-com era.
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S&P 500 funds make sensible technology bets
One of the problems during the dot-com era was that investors’ portfolios became too technology-heavy. The same thing could happen today if people aren’t careful. AI is rapidly changing society and many investors want to buy stocks or funds to benefit from its expected growth. However, many investors already hold top-performing stocks in their core portfolio – and some aren’t even aware of it. Aaron Ulrich, owner of Integra Financial Planning in Prospect, Kentucky, says clients often ask him about well-performing stocks like Nvidia, Tesla and Apple without knowing they are part of their diversified portfolio.
Instead of trying to pick the next big winner or investing in a single sector ETF, investors should diversify. For many investors, owning a core ETF that tracks the S&P 500 Index is a good starting point because it has “significant technology exposure” and also offers diversification, said Shannon Saccocia, chief investment officer of wealth at Neuberger Berman in New York. Outside of U.S. large-cap stocks, investors should invest a portion of their portfolio in small-cap stocks, international companies, emerging markets and energy companies, Saccocia said.
A diversified strategy is better than trying to pick the next miracle, Ulrich said. “We don’t know the next Nvidia. The idea that we can know the one stock today that will go up 2x, 5x or 10x in the next two to five years is impossible. Those same stocks can fall significantly,” Ulrich said.
More from the ETF strategist:
Here’s a look at other stories that offer investors insight into ETFs.
Don’t buy what you can’t afford
While the prospect of making a lot of money by investing in a particular sector can be exciting, Ulrich talks to clients about their time frame and risk tolerance, helping them understand how much can be invested beyond their daily needs. Their long-term goals also factor into these decisions.
When the dot-com bubble burst, many people lost significant savings that they could not afford to lose. At the time, Sudit was living near a retired couple who lost a significant portion of their savings by investing in dot-com stocks. The husband invested about half of the couple’s investable assets in the technology sector, and as the losses began to pile up, they had to downsize their home and cut their budget, meaning they couldn’t afford the vacations they’d dreamed of, new cars, or helping their grandchildren with their education. You have to be careful that enthusiasm for a particular sector doesn’t get in the way of reason, said Sudit. “You may have to miss opportunities because you cannot afford the enormous risk.”
Limit thematic sector investments to 20% of the equity portfolio
Some investors are attracted to investment themes. If so, they may consider thematic investing, but only after they have built a core equity portfolio. About 80% of an investor’s equity exposure — a number that depends on age, time horizon, risk tolerance and other factors — should be well-diversified, Hickle said.
To achieve broad exposure, the core part of the portfolio could include ETFs that follow this S&P 500 and focused on small-cap stocks Russell 2000. The Nasdaq 100 is also a popular core holding – it excludes financials and is technology-focused (nearly 70% of the fund’s portfolio is in the technology sector as of June 30). However, there is also significant overlap with the S&P 500. So for the sake of diversification, be careful.
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The performance of the Russell 2000 compared to the S&P 500 in 2026.
With the remaining 20% of equity exposure, an investor can then select investments that help express the themes that interest them most. Some clients do this by selecting individual stocks. Another option is to look at ETFs that focus on specific themes or sectors, such as the State Street Select Sector SPDRs, which break down the S&P 500 by sectors such as financials, healthcare and energy. When buying thematic ETFs, which now include many funds targeting AI and other technology innovations (space stocks are a recent example), investors should be careful that there isn’t too much overlap with their core portfolio, Hickle said.
“I would never own just one sector ETF because you could be wrong,” said Neale Ellis, founding partner and co-chief investment officer at Fidelis Capital in Dallas.
Those seeking additional exposure to high-flyers might also consider options that offer some upside potential but also limit downside risk. For example, you might consider hedged ETFs like the JPMorgan Hedged Equity Laddered Overlay ETF (Hello), T. Rowe Price Hedged Equity ETF (THEQ) and Parametric Hedged Equity ETF (PHEQ).
Consider the tax effect
According to Sudit, investors who want to invest in high-flyers often forget that they are growth investments and not income-producing investments, allowing them to realize significant capital gains. Short-term capital gains are taxed according to standard income tax brackets. After you hold the investment for a year, you will be taxed at long-term capital gains rates.
It’s important to consider taxes because selling a popular technology stock or fund could result in significant tax bills. However, it can still be a smart move if the risk is too high.
Sudit had a client who invested $5,000 in a wildly successful dot-com stock during the dot-com era without consulting an advisor. He hoped the growth would give him the funds to buy a sports car next year. He made a 10x return, but the stock appreciated so much that selling it would have meant huge capital gains. He didn’t take any chips from the table and the company went bankrupt. In this case, the customer could afford to lose their original investment and paper profits, but this does not apply to everyone, so investors need to be careful.
There may be ways to harvest tax losses. This involves selling securities at a loss to offset capital gains or reduced taxable income, resulting in a lower tax liability. Even if you have a tax advantage, it might still be worth selling an investment that’s too risky, Ulrich said. “You don’t want to hold on to something that you know isn’t working. Whether it goes up or down, if you’re concerned about the level of risk in your portfolio, there’s no point in continuing to hold on to it, so you’re effectively taking on more risk.”
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https://www.cnbc.com/2026/07/21/market-bubble-stock-risks-investing-mistakes.html
