One way to offset the heavy weighting of tech stocks in exchange-traded funds and index funds that reflect market advances is through an index like the Guggenheim Equal Weight S.&.P. 500 E.T.F., Mr. Brightman said. Equal weight indexes own the same amount of all stocks and so are not overexposed to market highfliers. Over the last decade, the S.&.P. 500 Equal Weight index has returned just over 10 percent annually, while the market-cap-weighted S.&.P. 500. has returned less than 9 percent annually.
Tom Galvin is lead manager of the Columbia Select Large Cap Growth fund. Though his mandate requires holding growth companies, he has been lightening up on some highfliers. “We have been trimming back some of the winners,” Mr. Galvin said. The fund has sold off roughly 20 percent of its Amazon stock and roughly one-third of its position in Facebook, he said.
Still, Mr. Galvin emphasizes that the tech rabbits have raced ahead largely because they’ve met or exceeded expectations. Apple’s year-over-year revenue growth has accelerated in recent quarters. Apple cited its revived strength in China, along with better-than-expected unit sales of iPhones, iPads and Macs, in its most recent quarterly report.
Similarly, a year ago, analysts expected Facebook to earn about $4 a share over the next 12 months, Mr. Galvin said. But Facebook succeeded so well in making its gigantic membership an audience for ads, it earned over $5 a share in the last four quarters.
Growth stocks may also have fared well because they are suited to current economic conditions. “I think growth stocks do very well in a low-inflation environment, when pricing power is elusive and therefore unit growth is the key driver to profit growth,” Mr. Galvin said. There is a flip side, though: “If you felt strongly we were moving to a sustained reflationary environment, you’d want more value,” he added.
Sebastien Page, head of the Global Multi-Asset division within T. Rowe Price, also sees merit in increasing value holdings. “As a general statement, value should benefit more than growth from the tax cut,” he said. Financial companies, typically considered value stocks, pay relatively high taxes and will benefit from a tax cut.
But because the market has risen almost nonstop since 2009, value stocks are also fairly expensive, some argue. “You don’t want to buy your beaten down, distressed deep value stocks,” said Mike Fleisher, lead portfolio manager of the Legg Mason BW Dynamic Large Cap Value fund. “You want to buy a value stock with a catalyst.”
Mr. Fleisher cited Citigroup as a worthwhile stock. “They’re buying back shares,” he noted. “Our quantitative research finds that when a company has bought back shares over the previous 12 months, it tends to outperform the next 12 months,” he said.
For investors disinclined to pick through hundreds of stocks to find the right value catalyst, there is another way to rebalance. Mr. Page of T. Rowe Price favors stocks in Europe, Japan, Australia and Canada. “Non-U.S. stocks have only been this cheap relative to U.S. stocks 7 percent of the time in the last 15 years,” he explained. Two E.T.F.s that invest in such developed market stocks are the iShares MSCI EAFE E.T.F. and the Vanguard FTSE Developed Markets E.T.F.
Mr. Brightman also favors rebalancing across more than just the growth-value axis. “Every sector of the U.S. stock market is expensive,” he said. “The fascination of the public with a narrow group of tech stocks is beginning to look a little bubbly.”
So-called value stocks are also no bargain, he said. “You will not escape a bear market by being in value stocks,” Mr. Brightman said.
The market won’t necessarily decline simply because prices are high, he added. “It just means over the longer term you would get lower returns,” he said.
Mr. Brightman urges very broad diversification. He includes United States equities, other developed market equities, emerging market stocks, real estate investment trusts, commodities and government bonds.
“If you have a long horizon, equal weighting and rebalancing are your friends,” he said.