Living with tech volatility

Strategy: Investors can protect themselves against the sector's ups and downs.

January 21, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

For many investors, the technology sector is like having an elephant at the dinner table. They might love it or hate it, but no way can they ignore it.

Technology stocks at year-end made up about one-quarter of the market value of the Standard & Poor's 500 index. And along with biotechnology and drug sectors, technology represents the best opportunity for growth, experts said.

"People talk about the risks of betting big on technology," said Christopher Traulsen, a senior analyst with Morningstar, the mutual fund tracking company in Chicago. "The flip side, by completely ignoring it, you are risking not participating in a very high growth area in the economy."

A year ago, it was hard to imagine that so many investors would be gun shy about technology. The Nasdaq composite index, which contains many technology stocks, had just come off the largest one-year gain - 86 percent - in its history. In March, it hit an all-time high of 5,048.62.

By November, the index was down to half of its high. The Nasdaq ended the year down 39.29 percent.

"The attitude has definitely changed. A year ago, technology could do no wrong. People wanted to put more and more money in technology," said Phil Behnen, a financial planner with A.G. Edwards & Sons in St. Louis.

"They saw it as an avenue for making quick money and didn't understand the downside."

At that time Behnen had a tough time convincing some clients to sell some of the tech stocks that dominated their portfolio and put the proceeds in other sectors. But after technology sputtered, Behnen's job was to persuade investors not to spurn the sector.

"They've gone completely opposite and want all of their money out of technology," Behnen said.

So, if most investors can't ignore technology, how can they lessen the volatility of investing in the sector and reduce their sleepless nights?

Make technology investments with money that you won't need within five years, giving investments time to recoup in a volatile market, Behnen said.

Diversify your portfolio to include other sectors. Jeff Hakala, a money manager with Seger-Elvekrog Inc. in Bloomfield Hills, Mich., recommends having no more than one-third of a stock portfolio in technology.

Anything above that, he said, and "you are playing with fire. You are not well-diversified. If that sector goes out of favor, you can lose a lot."

When buying individual tech stocks, choose established, well-managed companies that are leaders in their area, suggested financial experts.

"If you buy the name that nobody's heard of, that's a high degree of risk," said Sandy Liotta, resident manager of Merrill Lynch and Co. in Towson.

Mike Sola, a vice president with T. Rowe Price Associates in Baltimore, suggested investors seek out companies that have a competitive edge, such as in its products, access to distribution channels or a niche with high start-up costs that prevent a competitor from entering the business.

Sola said semi-conductors is one of the technology industries poised for long-term growth. "Semi-conductors have a long track record of consistent growth," although it is cyclical, he said.

Prospects are also good for software, telecommunications and server companies and businesses that provide hardware and software for data storage, Liotta said.

Buying individual stocks requires research, experts said.

"Technology is such a fast-changing, cut-throat business that you really have to understand the business. If you don't understand the business, don't buy the stock," Hakala said.

The alternative is to buy tech mutual funds or hire someone to manage your portfolio, he said.

Although mutual funds provide greater diversity than holding a handful of stocks, they are not immune from volatility. The average technology fund, which includes Internet funds, was down 33.1 percent last year, compared with a gain of 136.3 percent the year before, according to Morningstar.

Those who already own mutual funds should check the stocks within the funds to get a full picture of their technology exposure, Traulsen said.

"You'll be surprised to see how much technology you have in some of those funds," he said.

The average growth mutual fund, whether small-, mid- or large-cap, has more than 40 percent of its assets in technology, he said.

Most investors should avoid narrowly focused funds, such as an Internet business-to-business fund, because they haven't been around for very long and it's hard to judge the money manager's skills, Traulsen said.

"Don't chase performance," he added. That may sound odd in a year when so many funds have tumbled, but some have done very well, such as those focusing on fiber optics, he said.

Investors should be aware that some high performers "may be focusing on a narrow area that is working well, but may not continue to work well," he said.

Generally, investors should look for a fund with a three- to five-year history, preferably under one manager, and compare its record to similar funds, Traulsen said.

Whether buying stocks or funds, Liotta recommends dollar-cost-averaging, or investing the same amount of money regularly no matter what the market is doing.

"It's a good way to smooth out the bumpiness in the market," Liotta said. "You don't have to worry about putting all your money in at the high."

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