Technology Stocks and Your Portfolio

By Bobby Chen
Analyst, mPower

In This Story The Spoils of Growth High Tech's Meteoric Rise How Tech Changed Investing Some Tech-Boom Winners

A few months ago, technology stocks were all the rage on Wall Street. Analysts were clambering over each other to issue "buy" ratings, and many technology companies saw their value appreciate exponentially from the fourth quarter of 1999 through the first quarter of 2000.

Technology holdings can add to the growth potential in your portfolio, but the sector's volatility is a worthy opponent to the long-term growth most investors want for their retirement investments.

minute: read this article at a glance.

For a period of a few weeks that began in mid-March, technology stocks were seemingly in a free fall that saw many issues go down just as quickly as they had gone up. The technology-laden Nasdaq fell from an intraday, all-time-high of 5133 on March 10, 2000, to a low of 3043 on May 24, 2000 — a staggering 2,00-point (or 41 percent) decline in little over two months. Despite the mild recovery in the sector since, many technology stocks are still down considerably for the year.

With the markets failing to achieve any real direction during the summer slumber, volatility continues to reign. Investors in this high-flying sector finally got a wake-up call and now realize that technology stocks don't just go up.

The Spoils of Growth

Many high-octane growth funds have huge exposure to technology stocks — sometimes more than half of total net assets — as portfolio managers attempt to meet the unrealistically high expectations of investors.

According to fund flows data from AMG Data Services, over $30 billion went into technology funds in 1999, representing over 26 percent of all money that went into equity funds. And just in the first quarter of 2000, technology funds raked in another $32 billion, eclipsing the total for all of last year.

Over $30 billion went into technology funds in 1999, representing over 26 percent of all money that went into equity funds. And just in the first quarter of 2000, technology funds raked in another $32 billion, eclipsing the total for all of last year. — AMG Data Services.

In the face of such mind-boggling numbers, it's no wonder technology funds are popping up faster than investors can write their next check. Major fund houses such as Fidelity, T. Rowe Price, Janus, Franklin, Alliance, Dreyfus, Merrill Lynch, Prudential and Putnam all offer technology funds. These non-diversified funds are also increasingly showing up in defined-contribution plans, which could be a risky proposition for people looking to invest their retirement nest egg.

High Tech's Meteoric Rise

Investors have fallen head over heels for technology stocks in the last several years, and with good reason. Before anyone dismisses the sector as "hype" or chalks up its growth to "irrational exuberance," they must consider the fundamental reasons behind the explosive growth of high technology — by far the fastest growing sector in the country.

Investors have fallen head over heels for technology stocks … by far the fastest growing sector in the country. The catalyst of this growth is none other than the Internet.

The catalyst of this growth is none other than the Internet. The dawning of the Internet Age has brought forth a slew of advanced technological innovations, and often draws comparisons to the Industrial Revolution. Even Alan Greenspan, head of the Federal Reserve, acknowledges that we are living in unusual times.

So, how should retirement investors approach investing for growth in such unusual times?

Investing for long-term growth is not what it used to be, because investors have come to expect higher-than-average returns. Still, it is key that retirement investors avoid abandoning long-term investment goals in search of greater riches.

… it is key that retirement investors avoid abandoning long-term investment goals in search of greater riches.

How Tech Changed Investing

The increased productivity growth caused by the technology boom has allowed the U.S. economy to grow at a much faster rate, without kicking up inflation, than conventional economic theory would suggest possible. The result? The longest economic expansion in modern U.S. history over the last 8 ½ years.

Much of the credit for this expansion goes directly to increased efficiencies created by the use of high technology. The Internet is still an emerging platform for commerce and communications, but we have already seen great changes in major industries including banking, retail, and healthcare.

Regardless of how successful an online retailer (for example, Amazon.com) is in the long run, the technology revolution is forcing industry stalwarts (like Wal-Mart) to adapt and improve. Other recent developments, such as online stock trading, barely in existence just a few years ago, have forced every major Wall Street brokerage to develop its own online strategy. And Web-based auctioneer eBay is already the leader of the pack in the auction business, both online and offline.

The widespread acceptance of the Internet represents a fundamental shift. Never before have companies been able to reach so far, so cheaply.

Proliferation of Internet technologies will continue to be a strong catalyst for innovation. This is a fact not lost in the investment community as billions of dollars are pumped into the sector and investors snap up everything with great "potential."

So what exactly are technology companies doing that's having such a profound impact on our economy? For one, technology has changed the way business is done in many "old economy" industries. Online marketplaces that connect buyers and sellers are providing procurement services for everything from lumber to paper, steel to paper clips.

Never before have companies been able to reach so far, so cheaply.

The Tech-Boom Winners

It isn't just the old economy stocks benefiting from the tech revolution. The biggest beneficiaries of the "new economy" are companies that provide the "picks and shovels" that enable online services.

Companies like Ariba and Commerce One, which provide the software to set up many of the online marketplaces, have had triple-digit revenue growth. i2 Technologies, a provider of supply chain management software and services, has become an industry powerhouse by optimizing business processes for companies. Indeed, new software applications are creating new efficiencies in manufacturing processes across many industries.

And consultants such as Sapient and Scient can't work fast enough in helping companies develop their online presence. For anything you can think of, the service is either available or someone is working on it right now.

As technology continues to develop and evolve, there is little doubt that technology companies will shape the competitive landscape for many years to come.

From an investment point of view, investors should understand the risk and return profile of investing in technology stocks. The short-term rewards might be sweet, but the risk is sky high.

As evidenced by the latest market volatility, overexposure to technology stocks can seriously hinder those looking for a smooth road to retirement.

Most investment vehicles offer plenty of exposure to technology stocks. If you're looking to invest in technology stocks, first consider how these stocks fit into your overall asset allocation strategy. What percentage of your investments should be in this volatile sector? Then see how much exposure you already have within your current investment vehicles.

Come back in two weeks to read part two in our series on tech investing, which will look at the changing face of technology investing.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Technology Stocks and Your Portfolio

By Bobby Chen
Analyst, mPower

In This Story The Spoils of Growth High Tech's Meteoric Rise How Tech Changed Investing Some Tech-Boom Winners

A few months ago, technology stocks were all the rage on Wall Street. Analysts were clambering over each other to issue "buy" ratings, and many technology companies saw their value appreciate exponentially from the fourth quarter of 1999 through the first quarter of 2000.

Technology holdings can add to the growth potential in your portfolio, but the sector's volatility is a worthy opponent to the long-term growth most investors want for their retirement investments.

minute: read this article at a glance.

For a period of a few weeks that began in mid-March, technology stocks were seemingly in a free fall that saw many issues go down just as quickly as they had gone up. The technology-laden Nasdaq fell from an intraday, all-time-high of 5133 on March 10, 2000, to a low of 3043 on May 24, 2000 — a staggering 2,00-point (or 41 percent) decline in little over two months. Despite the mild recovery in the sector since, many technology stocks are still down considerably for the year.

With the markets failing to achieve any real direction during the summer slumber, volatility continues to reign. Investors in this high-flying sector finally got a wake-up call and now realize that technology stocks don't just go up.

The Spoils of Growth

Many high-octane growth funds have huge exposure to technology stocks — sometimes more than half of total net assets — as portfolio managers attempt to meet the unrealistically high expectations of investors.

According to fund flows data from AMG Data Services, over $30 billion went into technology funds in 1999, representing over 26 percent of all money that went into equity funds. And just in the first quarter of 2000, technology funds raked in another $32 billion, eclipsing the total for all of last year.

Over $30 billion went into technology funds in 1999, representing over 26 percent of all money that went into equity funds. And just in the first quarter of 2000, technology funds raked in another $32 billion, eclipsing the total for all of last year. — AMG Data Services.

In the face of such mind-boggling numbers, it's no wonder technology funds are popping up faster than investors can write their next check. Major fund houses such as Fidelity, T. Rowe Price, Janus, Franklin, Alliance, Dreyfus, Merrill Lynch, Prudential and Putnam all offer technology funds. These non-diversified funds are also increasingly showing up in defined-contribution plans, which could be a risky proposition for people looking to invest their retirement nest egg.

High Tech's Meteoric Rise

Investors have fallen head over heels for technology stocks in the last several years, and with good reason. Before anyone dismisses the sector as "hype" or chalks up its growth to "irrational exuberance," they must consider the fundamental reasons behind the explosive growth of high technology — by far the fastest growing sector in the country.

Investors have fallen head over heels for technology stocks … by far the fastest growing sector in the country. The catalyst of this growth is none other than the Internet.

The catalyst of this growth is none other than the Internet. The dawning of the Internet Age has brought forth a slew of advanced technological innovations, and often draws comparisons to the Industrial Revolution. Even Alan Greenspan, head of the Federal Reserve, acknowledges that we are living in unusual times.

So, how should retirement investors approach investing for growth in such unusual times?

Investing for long-term growth is not what it used to be, because investors have come to expect higher-than-average returns. Still, it is key that retirement investors avoid abandoning long-term investment goals in search of greater riches.

… it is key that retirement investors avoid abandoning long-term investment goals in search of greater riches.

How Tech Changed Investing

The increased productivity growth caused by the technology boom has allowed the U.S. economy to grow at a much faster rate, without kicking up inflation, than conventional economic theory would suggest possible. The result? The longest economic expansion in modern U.S. history over the last 8 ½ years.

Much of the credit for this expansion goes directly to increased efficiencies created by the use of high technology. The Internet is still an emerging platform for commerce and communications, but we have already seen great changes in major industries including banking, retail, and healthcare.

Regardless of how successful an online retailer (for example, Amazon.com) is in the long run, the technology revolution is forcing industry stalwarts (like Wal-Mart) to adapt and improve. Other recent developments, such as online stock trading, barely in existence just a few years ago, have forced every major Wall Street brokerage to develop its own online strategy. And Web-based auctioneer eBay is already the leader of the pack in the auction business, both online and offline.

The widespread acceptance of the Internet represents a fundamental shift. Never before have companies been able to reach so far, so cheaply.

Proliferation of Internet technologies will continue to be a strong catalyst for innovation. This is a fact not lost in the investment community as billions of dollars are pumped into the sector and investors snap up everything with great "potential."

So what exactly are technology companies doing that's having such a profound impact on our economy? For one, technology has changed the way business is done in many "old economy" industries. Online marketplaces that connect buyers and sellers are providing procurement services for everything from lumber to paper, steel to paper clips.

Never before have companies been able to reach so far, so cheaply.

The Tech-Boom Winners

It isn't just the old economy stocks benefiting from the tech revolution. The biggest beneficiaries of the "new economy" are companies that provide the "picks and shovels" that enable online services.

Companies like Ariba and Commerce One, which provide the software to set up many of the online marketplaces, have had triple-digit revenue growth. i2 Technologies, a provider of supply chain management software and services, has become an industry powerhouse by optimizing business processes for companies. Indeed, new software applications are creating new efficiencies in manufacturing processes across many industries.

And consultants such as Sapient and Scient can't work fast enough in helping companies develop their online presence. For anything you can think of, the service is either available or someone is working on it right now.

As technology continues to develop and evolve, there is little doubt that technology companies will shape the competitive landscape for many years to come.

From an investment point of view, investors should understand the risk and return profile of investing in technology stocks. The short-term rewards might be sweet, but the risk is sky high.

As evidenced by the latest market volatility, overexposure to technology stocks can seriously hinder those looking for a smooth road to retirement.

Most investment vehicles offer plenty of exposure to technology stocks. If you're looking to invest in technology stocks, first consider how these stocks fit into your overall asset allocation strategy. What percentage of your investments should be in this volatile sector? Then see how much exposure you already have within your current investment vehicles.

Come back in two weeks to read part two in our series on tech investing, which will look at the changing face of technology investing.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.