It seems like a no-brainer to invest in technology. Considering how much it’s transformed our lives – and how addicted we are to our smart phones — it seems silly not to hitch a ride to wherever technology is going.
But how do you invest in technology in a way that’s smart and sustainable?
Facebook, Amazon, Netflix, and Google (whose parent company is Alphabet) are sometimes collectively called FANG stocks. People like to look at them as a group because they’re some of the most popular and high-performing companies in the tech world. We’d add PayPal and Apple to that mix.
|Cumulative stock price growth2 (%)||295%||3,495%||12,108%||569%|
|Share price3 on 31 Oct 2008||38.13 (closing stock price on 18 May 2012)||57.24||3.54||178.52|
|Share price3 on 1 Nov 2018||151.75||1,665.53||317.38||1,070.00|
1Facebook held its initial public offering (IPO) on Friday, May 18, 2012
210-year growth of stock price from 25 Oct 2008 to 25 Oct 2018 (except for Facebook)
3The share prices listed above are split-adjusted share prices
Of course, who doesn’t want to find and invest in the next Amazon before anyone’s even heard of it? Isn’t that the allure of tech investing?
The potential problem with trying to scout the “next big thing” is that it can take a lot of time and expertise. Even investing experts who have full-time jobs doing that kind of research sometimes miss the mark and invest too early or too late and end up not making money.
You may hear talk of investing in tech exchange-traded funds or ETFs, but be aware that they may come with high risks. Anyone wanting to invest in tech ETFs, which are bundles of tech stocks, should be prepared to analyze that ETF’s average price-to-earnings ratio and historical volatility.
For the beginning or intermediate investor, focusing on FANG (plus Apple and PayPal) may be a more stable introduction to tech investing. You can even create your own ETF out of FANG+ stocks at www.motif.com, or simply invest in them individually. Holding all of them, as opposed to just Apple, or just Netflix, will allow them to balance each other out when one is up and the other is down. These are market leaders and solid companies that are not going to fizzle out anytime soon.
Markets often have 10-year cycles, and tech is no different. There’s been dizzying growth in tech stocks for the past decade, but the market is due for a correction within the next year or so.
What’s a “correction”? That’s when the entire market falls at least 20%, also known as a bear market. Corrections are often healthy and normal – after all, what goes up must come down! As investors, we don’t fear bear markets because they provide an opportunity to invest, to buy low.
The key is to understand this 10-year pattern and to plan to invest over a 5- or 10-year term, and to not freak out every time the market corrects or the company has bad quarterly results. It’s not about the little ups and downs, it’s about the long-term.
Facebook has been delivering more than 40% growth in revenue YoY in the past 4 years so that growth rate will surely continue, right? Not so fast
For a long time, FANG+ companies were not regulated, allowing for astounding growth and industry disruption that even put other companies out of business. But with the rise of privacy and other concerns, the companies are seeing more regulation and they’re spending more money managing that.
There are other reasons why FANG+ companies may see good but not crazy-high growth over the next 10 years. Investors weren’t particularly concerned about Amazon’s earnings for many years, knowing that the company was promising anyway and the investment was worth it. But now that the company is more mature, investors will start taking a more cautious approach and looking at whether Amazon can deliver earnings.
The bottom line, however, is that FANG+ stocks will probably have solid growth, just not at the insanely high rates that they’ve had over the last 10 years. That’s O.K.
Those wanting to dip their toe in tech investing might consider how much they want to invest, then using 10% of that to buy all of the FANG+ stocks. One could then wait until there’s more of a bear market, and purchase more of the stocks. The key is to invest in good companies in tranches, not all in one go, so you don’t catch “the falling knife.” You’ll want to “average in” in when stocks are falling during a bear market. “Averaging in” means to buy in decreasing increments — for example, when the share price is $100, then $90, then $80 — so that the average cost of your stock is lower.
If you invest after the market has recovered, you’d be investing as stocks go up and you might start to hesitate if you are worried things are getting “too expensive” or you “missed” your chance to buy them cheap. If that happens, you will not have built up a sizable position to reap the benefits of a recovering market. For example, Facebook stock has fallen 30% this year and you can start watching when to average in as it corrects more.
We are not offering formal investment or financial advice, but these are some ideas to inspire you about tech investing.
To learn more about financial terminology, check out our glossary.
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