Tech is Indestructible. But Don't Be Stupid: Diversify!
The coronavirus-induced stock market crash has created unprecedented opportunities. Since equities fell off a cliff in mid March 2020, many sectors have fully recovered. In particular, the information technology sector has been on a tear. Should you invest in tech?
YTD, the S&P 500 Information Technology Sector ($SRIT) is up +24.26%. Since the rapid rise and recovery of this sector, talks of a tech bubble have been incessant. Tech valuations have been deemed too high and the recovery too swift. According to many "experts", this has created a perfect bubble ready to pop. So, is the technology sector a great place to park your money? We present our perspective.
S&P 500 Information Technology Sector Performance.
According to Money Morning, the technology sector's performance over the years been nothing short of extraordinary.
Information current as of 08/05/2020. The question remains: how reliable is tech?
Tech is indestructible!
Technology controls our lives. Technology commends inordinate influence on both the S&P 500 (~25%) and the Nasdaq composite index (~50%). This era's technology sector is vastly different from that of the 90's and 00's. Tech companies nowadays are highly profitable. Last week, the large tech giants crushed their earnings expectations. To be able to post such solid numbers and be so resilient in the face of an ongoing pandemic is remarkable. The so-called experts and bubble-maniacs had been expecting lackluster numbers. They continue to be proven wrong time and time again. If you had heeded their dire warnings of a tech bubble during the early signs of this recovery, withdrawn your money, and sat on the sidelines, you would have missed out on some serious gains. We believe investing in tech is a wise move.
How to play the tech game.
There are many ways to jump on the tech bandwagon. You can invest in individual technology stocks or buy a technology exchange-traded fund (ETF) or mutual fund. With the technology sector being so vast and stock-picking labor-intensive, we believe the best way to cash in on the explosive technology sector is through a low-cost technology ETF. A low-cost technology EFT gives you access to the big technology giants (Apple, Facebook, Amazon, Google, Microsoft, Netflix) and other fast-growing smaller companies. There is no shortage of tech ETFs. We outline 5 tech ETFs in the table below that are worthy of your cash: the Technology Select Sector SPDR Fund (XLK), Fidelity MSCI Information Technology EFT (FTEC), Invesco QQQ ETF (QQQ), iShares Expanded Tech Sector EFT (IGM), and the Vanguard Information Technology ETF (VGT). Data is current as of the article publication date.
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Tech is great, but don't be stupid. Diversify!
The stock market is inherently volatile. The coronavirus pandemic is not making things any better. Your unrealized gains can be wiped out as swiftly as they are accumulated. Tech gains are no different. There are many ways to protect your gains, including selling and taking profits, placing stop-loss or limit orders or diversification. For the long-term buy-and-hold investor, we recommend diversification. Diversification is the simple process of putting your money in different asset classes or sectors to minimize financial loss. You should create a portfolio that meets your investment objective, risk tolerance and goals. Here's how we provide defense to our technology ETF gains:
- A value ETF
- A dividend ETF and a few individual dividend stocks
- An international growth ETF
- A mid-cap growth mutual fund
- A ultra-growth small-cap mutual fund
- A variety of different individual stocks
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The bottom line
Nobody can predict what the stock market will do from one minute to another--not you, not the "experts"! The technology sector has seen an explosive rebound since equities fell off a cliff in March. Incessant talks of a tech bubble have driven many investors away from technology stocks. Others have completely disinvested from the stock market. We believe tech investing is a wise move. You should ignore the noise and do what's best for you. Today's technology companies are very profitable. This is evident in the great long-term performance returns of the many technology ETFs. A technology ETF may suit your large-cap needs and lead to solid growth. If you do decide to invest in tech, always remember to diversify your investments.
Disclosure: We are long FTEC. We wrote this article ourselves. It expresses our opinions. We do not receive compensation from the companies highlighted, nor do we have any business relationships with them. All data is current as of the date of article publication. This article contains affiliated links to investment products. We may receive a commission through those links when you join the partner. Information presented here should not be construed as financial advice. You are always encouraged to conduct your own research. Our full disclaimer.