Playing it safe when investing in tech

Technology is a difficult area for investors and there are many people who choose to give it a wide berth.

Investors see tech companies collapse and remember the dot com bubble burst with great losses. There was a lot of money made during the inflation of that bubble (much of it made only on paper), but a huge amount of money was lost when it all turned bad.

A bit like the 1987 share market crash, there are still plenty of people around who can tell you in great detail why you should avoid tech stocks.

Tech is intrinsically a difficult, risky area to invest in. It is very fast moving and one company gets leap-frogged by another as the “next great new thing” is quickly replaced by another “next great new thing”. As a result, it is always hard to predict which companies will win through and take a permanent place in the firmament.

It is also hard to value tech stocks. Many do not have profits and without profits, traditional valuation metrics such as price:earnings ratios or dividend yield, are much less useful.

And there are other risks. An early-stage, unprofitable company with a high cash-burn can easily run out of money and go broke.

However, although these are things that you should worry about, they should not stop you investing in tech. We live in times of quite stunning innovation and technological breakthroughs – it makes no sense to shun the area completely. There is certainly money to be made.

In fact, the five biggest companies listed on the US sharemarket are now all tech companies: Apple, Alphabet (Google), Microsoft, Amazon and Facebook, in that order, are the most valuable companies in the world. These companies and others like them are our future.

There are people who have made a lot of money from technology and they are not just the founders of these companies – pension funds, KiwiSaver accounts and private portfolios have participated and benefited.

But it is hard, almost impossible, to know which companies to buy unless you know a lot about technology and study the market assiduously. That does not describe too many private investors.

For my money, the way to invest in tech stocks is through managed funds.

Tech is an area where I do not have the expertise to pick winners or identify stocks that are undervalued. I would therefore prefer to hire active managers; those who are expert and who spend all their working hours studying the comings and goings of technology companies.

There are plenty of tech based funds, mostly in the US or the UK. You will need to get advice to find the best funds (probably from a sharebroker), but that should be worthwhile.

The dot com bubble and crash with its crazy excesses is in the past. There are now plenty of tech companies that will give stunning returns over the coming years. Take some advice on the right funds and join the party.

Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.

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