For the last 18 months, technology has played a very important role in markets around the world. Will technology continue to boom or is the balloon ready to burst? What goes up can come down! Personally, I am a big believer in the future of technology. Technology exists in every facet of our lives and like it or fear it, we cannot stop it from growing at a dramatic pace.
That being said, technology today, by traditional valuation methods, is over-priced. No matter what happens, you should not expect recent returns to continue at the same pace in the future. The biggest danger facing investors today is their expectations of return. No investment can maintain the pace that technology has delivered over long periods of time. Remember that investments capable of increasing 100 per cent to 200 per cent, are also capable of dropping just as fast.
We can bring perspective to the picture from Asia and the emerging markets in early 90's. More recently, think about the banks and the financial sector. I remember not long ago when bank stocks rose dramatically, that many investors said “how can you go wrong with the five major banks in Canada?” In 1998, the stock prices of these cornerstones of the Canadian economy dropped as much as 30 per cent to 50 per cent. Today, only 18 months later, banks are out, in favour of more volatile, trendy tech investments.
If you thought bank stocks were invincible, these technology stocks could drop faster and harder.
A fundamental argument
Every investor and every portfolio should have a technology component. But given the strong growth over the last couple of years, don't get caught chasing performance and over-exposing yourself to this volatile sector. One of the key principles of investing is to diversify your holdings.
Never keep all your eggs in one basket. Never have more than 10 to 20 per cent of your total investment portfolio in one segment. Also, make sure you manage the mix as much as you manage the investments. New investors thinking of entering this sector should have a strong stomach and be aware that what goes up can also move down. Don't learn the hard way. In the end, make sure you own some technology, but don't get too greedy in today's hot market.
FUND REVIEW – Play technology without being married to technology.
Today, there are a number of great mutual funds that invest in technology without being directly exposed to technology. Funds like Universal Select Managers, AIM Global Theme, and Talvest Multi-Manager carry significant weighting in the technology sector but also diversify holdings into other sectors. By nature of this diversification, these funds can dramatically reduce the risk without giving up considerable upside returns. Take a serious look at these funds if you want to add technology to your portfolio.