It’s been nearly a decade since investors enjoyed the skyrocketing values of stocks like Pets.com and Kozmo.com only to discover they were sitting on dot-com bombs. When the dot-com stock boom imploded, investors shied away from Web-based companies, and funneled their remaining funds into “safer” bets such as utilities and blue chips.
Many investors are still living with the legacy of the early 2000s, even in the midst of the Web 2.0 movement that showcases emerging technologies and applications like social networking, blogs, wikis, and user-generated content. The category was one of the worst-performing in 2010. But recently, venture capitalists have begun pouring money into a few bellwether dot-coms. In October, for example, video calling startup Wham!Inc netted $3 million in a Series A round of venture capital financing, while Buddy Media raised $23 million to build a brand-focused Facebook management platform.
Bobbie D. Munroe, financial planner and owner of Atlanta-based Fraser Financial thinks it’s time. “Technology stocks remain undervalued because people are scared of them,” she says. “The good news is that when people are scared of something, it’s often a pretty good idea [to buy].” Munroe notes that you can accumulate tech stocks right now for a price lower than what many analysts believe they’re worth. For a broad exposure to technology, Munroe suggests investors look at Vanguard Information Technology ETF (VGT). Among actively managed technology mutual funds, Munroe likes Buffalo Science and Technology (BUFTX).
Lee Baker, certified financial planner and president of Apex Financial Services Inc. in Tucker, Georgia, says if history is a guide, another technology boom could be right around the corner. “The question is, what subsectors are the best bets?” he asks. “That remains unanswered at this point.”
When getting back into technology, Baker cautions investors not to load up on any one sector. “Rewind back to the dot-com boom,” he says. “Most individual investors got burned because their portfolios lacked diversification.” He recommends that his clients limit technology holdings in their portfolios to no more than 5% of their assets. He sees technology ETFs (exchange-traded funds) and tech-oriented mutual funds as particularly solid options for those who lack the time necessary to conduct in-depth research on their investment choices. One option Baker likes in particular is the Technology SPDR (XLK), an ETF that offers broad-based exposure to the entire technology sector at a low expense ratio. “All sectors of the market have been beat up over the last two years,” says Baker. “Now is a good time to do some exploring, and to include technology as part of that process.”
One cautionary note to investors looking at the new crop of dot-com contenders comes from Dock Treece, president of Treece Investment Advisory Corp. in Toledo, Ohio: Don’t get sucked into the cyclone of news-breaking venture capital investments. Treece sees technology as a good investment choice for 2011, but maintains that “as an individual investor, you never want to invest money that you can’t afford to lose. Strive to create a diversified portfolio, with Web 1.0 and Web 2.0 stocks as part of that larger picture.”
Treece expects tech stocks to gain some momentum from the overall economic recovery that took hold in late 2010 and that is predicted to continue into 2011. Fraser Financial’s Munroe is also bullish, standing behind her aggressive investment stance for the technology and dot-com sectors. “It’s hard to predict the future, but one thing we know for sure is that tech has changed the way we do everything,” she asserts. “This is enough proof that technology remains a good bet when incorporated into a portfolio the right way.”
Do’s and Don’ts of Investing in Technology in 2011
- Do pay attention to venture capital trends, but don’t get too wrapped up in them
- Do strive to create a diversified portfolio that includes a broad range of stock sectors
- Don’t invest money that you can’t afford to lose
- Don’t expect to get in on the ground floor of initial public offerings that will skyrocket to triple-digit prices (like so many investors did in the ’90s).
- Don’t neglect to do due diligence before putting money into a Web 2.0 company