A FEW YEARS AGO, investing looked simple. All you needed to do was find a technology stock and throw money at it. Everybody from your plumber to your dry cleaner was doling out "hot" stock picks.
Then reality set in.
They may have been Wall Street's darlings in the late 1990s, but tech stocks started the new millennium with quite a stumble. After the tech-heavy Nasdaq Composite index rocketed 86% in 1999, the party came to a screeching halt as the index shed 39% in 2000, 21% in 2001 and 32% in 2002. In 2003 and 2004 tech investors found their smiles again as the Nasdaq jumped 50% and 9%, respectively.
For folks who bought the right stocks early on in the tech revolution, the pullback was relatively minor compared with the colossal gains seen during the mid and late 1990s. Consider this: If you'd invested $10,000 in Cisco late in 1994, you'd have been sitting on more than $99,000 as of the end of 2004. And that's even after Cisco's 28.6% loss in 2000, its 52.7% loss in 2001 and its 27.7% loss in 2002. Unfortunately, many tech investors weren't so lucky. They bought the wrong stocks at the wrong time and are still suffering.
Many investors are still wary of tech stocks. Some, fearing the sector has once again gotten ahead of itself, are seeking safety in less-volatile consumer and financial names. Most of those who have stayed in tech have sworn off Internet stocks with little by way of earnings, opting instead for stalwarts like Microsoft. But a few have chased after not-yet-profitable highfliers, notably satellite radio competitors Sirius and XM.
While the last few years have been extreme, with dizzying highs followed by stomach-churning lows, tech is always going to be a bumpy ride. Consider that the S&P 500's telecommunications stocks have been 20% more volatile than the overall index over the past five years, and its information-technology stocks have been twice as volatile.
Wondering what it's like to invest in one of these bucking broncos? Our "Try Your Luck in Net App" game (above) will give you a pretty good idea of how gut-wrenching it can be. It traces the path of Network Appliance — the computer-storage giant that boasted a return of 270% in 1999 — over a condensed, two-month period from February to April 2002. As you'll see, profiting ain't easy.
The good news is that after a few tough years, tech stocks are now better understood. Previously thought to be somewhat immune to business cycles, technology is, we now know, subject to many of the pitfalls of other sectors. The result is that investors are demanding to see real earnings — not just the promise of them someday — as well as a plan that can pull a company through rough economic times. Investors will return to the good companies once the dust has cleared. But unless you have patience and staying power, tech stocks can fray your nerves — and your portfolio.
Risk/Reward
While technology stocks as a group tend to be more volatile than the broader market, all tech stocks are not created equal. Indeed, as the revolution in computing and communications matures, a new breed of more stable high-tech stock is emerging. True, even the stocks of giants like Microsoft and Intel still tend to bounce around more than a traditional blue chip like General Electric. But their earnings have become predictable enough to eliminate the wild volatility found among tech companies relatively new to the scene.
A selection of these high-tech blue chips have a place in many investors' long-term portfolios, since the volatility they do exhibit can be offset by their superior growth prospects over time. Many experienced investors then try to augment their returns with riskier stocks that offer the possibility of even greater growth.
We'll discuss successful strategies for investing in technology stocks in our Strategic Investing section. But the core advice is this: Investing in these uncertain waters requires diversification so that your exposure to any one stock is limited. With a significant amount of time and effort, you can create a well-diversified portfolio yourself. Or you can buy one of the many technology mutual funds out there and hand the management responsibility over to a professional.
If you do go that route, first make sure that the manager believes in a mix of blue-chip tech stocks and racier offerings. The advantage to that is that the fund manager is paid to stay on top of the ever-changing world of technology and to pick the right set of investments to take advantage of the ripest opportunities.
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