Traditional investors look at the technology sector and shake their head with disbelief and dismay in equal measures. Many of these large technology companies are valued at billions of dollars yet they are unlikely to make a profit for many years to come. Indeed, many will never make a profit and fall by the wayside as competition intensifies. So, is there really a place for technology shares in the portfolio of a passive investor?
A hedge for the future
The key to successful investment is to gain exposure to sectors in particular companies which are doing well today and will do well tomorrow. There are also many companies which are valued on “hope value” today but may well create a massive return going forward. In effect, technology shares which are unprofitable today offer a hedge for the future. If you find a good one, it may well be a game changer for your investment portfolio!
Risk/reward
As with any investment, and more so with technology shares, you need to go in with your eyes wide open. The younger a technology company the greater the risk but the greater the potential reward. If you invest in a company which has proven technology which has yet to be fully exploited, the risk may be less but the rewards will be less. The share price will likely have caught up with the “proven technology” tag and will be taking just a little bit more for granted going forward.
Alternatively, if you look towards a relatively young company with a potentially groundbreaking technology then the risks will be higher but the potential rewards could be enormous. It is worth noting that the majority of “young technology companies” are likely to fall by the wayside due to a mixture of mismanagement, funding shortfalls or indeed competition in the sector. So, if your emphasis is on younger technology companies then it would be sensible to look at a number of companies, to spread the risk, or a technology investment fund.
Some companies do make it!
You only need to look at the likes of Facebook, Apple, Google and an array of other technology companies to see that some do actually make it. We can only imagine the enormous return for investors who bought into these companies in their relative infancy. If we also look at the likes of Amazon, often ridiculed in the early days, this has become one of the largest companies in the world. At the time, Amazon was written off by many so-called experts as the company kept on investing profits to improve systems and exposure. Look where the company is today!
Do your research
As with any investment, you should still do your research with regards to technology company exposure. In some cases the detail may not mean an awful lot to you but if you can get a general idea of where the company is going, management experience and plans for the future, you can make an informed decision. It is also essential not to over invest in technology shares and maybe put aside a relatively small percentage of your investment funds for the sector. There are so many new technology companies around today that you can literally dictate your own risk/reward ratio. However, be prepared for a rocky ride even with those companies which eventually make it to fruition!