Did the tech selloff hurt more than it should? Here are 6 tips to avoid the pain next time

After the tech selloff on Wall Street on Monday night, I found myself checking my portfolio the following morning and figuring out how much exposure I had to US tech, and to NVIDIA.

I wasn’t overly worried, but I certainly went through line by line to try to figure out just how much the selloff might hurt. I’m sure I wasn’t the only one.

And while markets have since bounced back a touch, and the DeepSeek selloff could prove to be a minor bump in the road, it did provide a timely reminder about why it’s important not to have too much exposure to any particular theme or stock.

Munro Partners’ Nick Griffin has been an investor in NVIDIA (NASDAQ: NVDA) for a long time – well before it experienced explosive growth in the past couple of years. 

Griffin has spoken to Livewire many times about why he is bullish on the stock. He wasn’t particularly concerned by the sell-off, saying that “the DeepSeek news doesn’t change the medium-term outlook, and that the pullback could provide for a good opportunity to invest in an area that we still feel will grow structurally over the next decade”.

Take that as you will, but what’s perhaps more important to note here is that whilst Griffin has been spectacularly right about Nvidia for an extended period, and has enjoyed the benefits of the trade, as per the December 2024 Munro Global Growth Fund Report, the position size for Nvidia was just 6.4%. Not 20%, or 50%. 

And that’s likely because Munro, like all good managers, employs portfolio construction rules that limit how much exposure can be taken in a particular sector or stock. And that makes for good portfolio management.

Why is portfolio construction important?

To better explain why portfolio rules are important, I reached out to the person who taught me a lot about it, Isaac Poole from Ascalon Capital.

Poole is a firm believer in the power of governance and risk management when constructing investment portfolios.

"Setting limits can help manage risk and also ensure there is an appropriate level of diversification in a portfolio," he explains.

"Limits can also help protect against absolute loss of capital in the case an individual investment performs very poorly. For example, if you limit exposure to 5% in your portfolio, and an individual investment goes to zero, then the maximum loss is just 5%."

This careful approach to risk ties directly into an investor’s overarching goals. "The portfolio objective matters," Poole emphasises.

"For example, if you are trying to match an index, and the index has significant concentration, then you are going to have to match those exposures. It is one of the risks of investing in passive indexes – it is great when concentrated investments are marching higher. But your portfolio is left open to any negative outcomes from those concentrated positions."

When it comes to real-world applications of portfolio construction rules, Poole has seen a range of strategies employed to manage risk.

"We’ve used and seen used various limits to manage portfolios. These include both hard and soft position sizing limits. Hard limits force you to be within certain position ranges, while soft limits force a review of the holding. There are also risk limits. These could include stop-loss limits, duration or convexity limits, and value-at-risk limits. All of these have their limitations, but are useful in managing portfolios to their objectives."

One example of when these rules proved invaluable came during his work with a large sovereign wealth fund in 2015.

"They had an exposure limit on Chinese equities that was set to 5%. You might remember that Chinese equities doubled over a 12-month period through to mid-2015. At that stage, there was a lot of agitation to ignore the rule, and add more exposure.

We stuck to our governance process and to the limits – which proved to be critical as Chinese equities almost halved over the subsequent couple of months", said Poole.

Shanghai Stock Exchange performance in 2014/15 (and the fall thereafter)

However, sticking to such rules is not always easy.

"It is human nature to be tempted to break these," Poole admits.

"The way to manage this is through a clear governance framework with appropriate checks and reviews. Pre- and post-trade compliance, regular governance reviews, and oversight help portfolio managers avoid breaches."

The recent volatility in the tech sector serves as a prime example of why such governance is essential.

"A big market rally in a concentrated theme, and a sudden reversal, drives home the importance of investment objectives, governance processes, and diversification".

"It is also important to manage expectations – if your risk processes allow you to pile into that theme, then your investors should be prepared to capture downside when it turns". 

For Poole, strong governance is not just an additional layer of protection—it is a source of alpha. 

"Implementing governance processes is difficult – we’ve seen lots of investors and worked with some consultants that are simply not up to speed on this important area. Investors should focus on investment governance just as much as they do on implementation – as good governance can add alpha over time!"

6 common portfolio rules

For those who don’t have a set of well-defined portfolio rules, it’s never too late to set them up. Below are some common rules that might help with creating this process.

• Consider your risk tolerance: Your risk tolerance is how comfortable you are with risk. People with a higher risk tolerance can take on more risk for a higher potential reward.
• Diversify: This is a broad bucket that can involve understanding different asset classes and allocating to them as appropriate. It's also about understanding the correlation between the assets in your portfolio so as to not be too concentrated.
• Overweight/underweight: For an index-aware stock portfolio, sector weights to be no more than 5% over or under (for example, if the financials sector is 20% of the benchmark, you can’t hold more than 25% in financials, or less than 15%). For individual stocks, no more than 3% over or under. These rules will ensure you don’t underperform your benchmark by too much but will also limit the upside.
• Upper limits on single positions: As the saying goes, it’s wise not to put all your eggs in one basket. An upper limit of no more than 10% of your portfolio in a single stock could prove valuable.
• Rebalance regularly: Rebalancing your portfolio can help keep your investments aligned with your goals and risk tolerance.
• Measure your portfolio's performance: It’s always important to see if you are tracking against your benchmark or investment goals. Regular reviews ensure you can make adjustments if necessary. 

Over to you

Do you have any favourite portfolio construction rules? Please share them in the comments section below.