A FEW YEARS ago, investing looked very simple. All you needed to do was find a technology stock and throw money at it. Everybody seemed to have "hot" stock picks.
Then reality set in.
They may have been Wall Street's darlings in the late 1990s, but tech stocks have lost much of their luster. The numbers tell the story: 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. Granted, for folks who bought the right stocks early on in the tech revolution, this pullback was still relatively minor compared with the colossal gains seen during the mid and late 1990s. Consider this: If you invested $10,000 in Cisco Systems 10 years ago, you'd have been sitting on more than $120,000 as of the end of 2002. 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 suffered the agony of defeat.
As a result, tech stocks are no longer at the top of every investor's wish list. Fearful of shriveling profits amid an economic slowdown, many people have abandoned growth stocks in sectors such as technology and have sought out safety in less-volatile arenas like pharmaceuticals and financials. Most of those who have stayed in the game have sworn off Internet stocks like Priceline.com and CMGI. Instead, they've gravitated to more-established companies Dell Computer and Microsoft.
While the last few years have been extreme — with dizzying highs followed by stomach-churning lows — tech is always going to be bumpy ride. 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 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 like Internet portal Yahoo.
A selection of these high-tech blue chips should be in everyone's long-term portfolio, since the volatility they do exhibit is 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.
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. All you have to do is monitor him or her — and keep your day job.
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