The technology sector is booming. It’s much bigger than any other within the global stock market, out performing all other sectors in recent years.
The technology sector is booming. It’s much bigger than any other within the global stock market, and in recent years has also performed far better than all other sectors too. That’s made some wonder why you’d want to invest in anything else. So should investors focus on tech?
Let’s Talk Tech
The technology sector is a very broad and diverse area containing hundreds of companies from hardware to software, semiconductors, cloud computing, internet infrastructure and more. Due to its growth it now makes up nearly a quarter of the global stock market. By comparison, the next largest sector – Financials – makes up around 14%.
As diverse as the tech sector is though, it’s also very concentrated in some respects. Nearly 80% is made up of US firms, and nearly a third is just two companies – Apple and Microsoft. Of course there are lots of other large companies and hundreds of lesser-known smaller companies too.
Many investors believe technology is the future of the global economy, as technological advances accelerate and tech companies continue to innovate and grow. Certainly for many years, anyone that’s invested in the tech sector has reaped the rewards of these developments.
The technology sector produced nearly three times the returns of the global stock market over the last ten years. A lot of that is down to its high exposure to the US stock market and Apple and Microsoft, which all performed strongly. Many other technology companies, however, have also enjoyed rapidly rising share prices for several years.
The million-dollar question – or literally the several-trillion-dollar question – is whether the tech sector can continue its growth. There are those who say it can, and others that say it’s been too strong for too long and must come back to earth eventually. As with many things in investing, the answer is no-one really knows for certain.
What we can do though is look back to see how the last big technology rally fared. That was during the 1990s, when the sector experienced huge growth as investors predicted how technology companies were going to transform the world – similar to today’s forecasts. Share prices soared but eventually the enthusiasm ran out and they fall back down hard.
Will History Repeat?
At one point the technology sector lost around 80% during the first 10 years of the millennium. While the broader stock market also fared badly, it managed to end the decade in the black, while the technology sector delivered a 10-year return of -53%.
Some will point to the ‘dot com bubble’ bursting being the main driver of those dire negative returns, but the technology sector wasn’t just made up of speculative tech start-ups. Back then some of the largest stocks on the broader stock market were established technology companies like Intel, Cisco, Microsoft, IBM, and Oracle.
It’s important to stress this isn’t in any way a prediction of a looming technology sector crash. It could keep rising well ahead of everything else, or it might not. The point we’re trying to make though is whenever investors expect halcyon days to carry on forever they’re often left disappointed.
No-one really knows how well the technology sector, or any other sector for that matter, will do in the future. So we think it makes sense to avoid putting all your eggs in one basket. That means investing in all the major sectors, so you get exposure to everything. That way you’ll benefit from whatever turns out to be the chart-topper of future years, and you won’t be over-exposed to any sectors that go through a rough patch.
We also like to invest in each of the sectors in broadly the same proportion as the global stock market. So given the tech sector makes up a big chunk of the market, it also features significantly within our portfolios. If any other sectors do well and grow to become a bigger part of the market, the same will be happening within our portfolios.
Correctly forecasting the fate of any sector is very difficult to do consistently – you might of course get it right some of the time, but you could also turn out to be wrong. We prefer to back what tends to perform well over time regardless of the fortunes of any sector, tech or otherwise, and that’s the market as a whole.