Rewinding the Tape On Tech

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It would be easy to give up on technology stocks. They're stumbling again, as the likes of Lucent and Nortel pile on bad news. Everyone knows about the glut of cell phones, PCs, chips and fiber-optic line gathering dust. Earnings stink across the board, and stock-market gurus predict we're headed for a demoralizing test of the April lows. In short, gloom is as plentiful as the routers and switches Cisco can't sell. So a lot of investors are hedging their allegiance to technology--and rightfully so. If you want easy odds, take the Lakers to threepeat. Investing in tech has never been a lay-up, save for a few aberrational years in the '90s.

Certainly tech stocks were no slam dunk in the '50s, when transistors replaced the vacuum tube, or in the '60s, when microchips supplanted simple transistors. Those developments gave rise to the upstart Intel, while the shares of companies like Transitron Electronics melted away.

This Darwinian action has been repeating in tech land for decades. Yet through it all tech's risks have yielded ample rewards. The key, as ever, is a long-term approach, limiting tech holdings to a comfortable percentage of your portfolio and staying well diversified within the sector. In most cases, that means investing through mutual funds.

When the Internet bubble was in full swing, legends Peter Lynch (who can't work a PC) and Warren Buffett (who won't touch a PC stock) took a fair amount of grief for their technophobic ways. To their credit, they raised awareness of the risks building throughout the stock market--and in tech land in particular. Yet I thought they were wrong to warn individual investors consistently off tech stocks entirely, and I said so in a November 1999 column.

Given the painful losses that commenced just five months later and endured for more than a year, I've been doing some soul searching of my own. But after crunching numbers with the help of fund-research company Morningstar, I'm happy to report that tech still makes sense.

So what is tech's record? I looked at it three ways, starting with the Waddell & Reed Science and Technology Fund. Since its inception on May 16, 1950, the fund has returned an average of 12.4% annually--echoing the 12.8% return of the S&P 500. The Kemper Technology Fund, which started in 1948 as, get this, the Television Fund, is the only other survivor from that era. Its returns modestly top the S&P 500 during the past 50- and 25-year periods.

While interesting, these funds aren't all that useful because both have made big moves in and out of non-tech sectors such as pharmaceuticals, biotechnology and energy. And way back when, tech was an insignificant 5% or less of the S&P 500's market value.

Modern tech funds--devoted to Silicon Valley--didn't spring up until the '80s, when tech was more than 10% of the S&P 500 market cap and on its way to 30% by 1999. (Today it is 19%.) Four of the five oldest post-1980 tech funds (see chart) have generated market-beating returns since inception. They have also consistently outperformed on a rolling five-year basis since the late '80s. For example, the oldest of the modern funds, Fidelity Select Technology, has whipped the S&P 500 and Russell 2000 in every five-year period since the one beginning in 1989. It underperformed in periods back to 1981.