| Topic - Technology Stocks | Education Center |
NO BREED of investment fires the imagination more than the stocks of highflying technology companies. And why not? Consider that $10,000 invested a decade ago in semiconductor giant Intel would be worth almost $500,000 today. The same investment in fledgling Microsoft would be pushing $1 million. The worldwide PC revolution has created wealth at an unprecedented rate both for innovators like Microsoft's legendary Bill Gates and the countless secretaries he employs who are sitting on millions in Microsoft stock. Anyone who has thought about investing has probably indulged at least one fantasy of discovering the next Dell Computer or Cisco Systems.
Why do these stocks create such wealth? Because the companies behind them grow so quickly. We live in an age when technology can change our lives seemingly overnight, and that invariably creates rich new markets and explosive earnings growth for countless companies.
Witness the rise of the Internet. Networking leader Cisco has caught fire by developing better equipment to manage the Web's vast flow of digital information. PC-maker Dell has become one of America's hottest stocks by providing cheap tools to access that information. America Online has grown from nothing to more than $3 billion in sales by making the information compelling. Add it up and those three companies alone generated $305 billion in new wealth for investors between 1995 and 1998.
For all this rich opportunity, however, technology stocks can be treacherous. New markets are by nature filled with danger, and that means actual earnings -- or the prospect of future earnings -- can fluctuate wildly. News of a PC-sales slowdown at Christmas can cause investors to flee any number of related stocks -- from PC-maker Gateway to Novellus Systems, which makes the equipment that fabricates the chips that power the PCs that Gateway sells. Investors will return to the good companies once the dust has cleared. But unless you have patience and staying power, such crises can easily wipe you out.
Risk/Reward
The good news is that while technology stocks as a group tend to be more volatile than the broader market, they are not
monolithic. Some classes of tech stocks are much more volatile than others. Indeed, as the revolution in computing and
telecommunications matures, a new breed of more stable high-tech stocks is emerging. Microsoft, Intel, Cisco, Lucent
Technologies -- these stocks tend to bounce around more than a traditional blue chip like General Electric. But their
earnings have become predictable enough to eliminate the gut-wrenching volatility found among highflying startups like eBay
or Amazon.com.
A selection of these high-tech blue chips should be in everyone's long-term portfolio, since the volatility they do exhibit is easily offset by their superior growth over time. Many experienced investors then try to augment their returns with riskier stocks that offer the possibility of even greater growth. But unless you have the time to monitor these stocks carefully and the wherewithal to weather the inevitable short-term blowups, this can quickly turn into a loser's game.
Our core advice is what we will tell you repeatedly: The key to investing in these uncertain waters is diversification. With a significant amount of time and effort, you can create a well-diversified portfolio yourself. Or you can buy one of the many fine technology mutual funds out there and hand the management responsibility over to a professional. 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. All you have to do is monitor him -- and keep your day job.