Why Technology Investments Shine
There are at least 250 notable indices around the world that track the performance of a particular sector or group of companies. The best known in the UK, the FTSE 100, covers simply the largest 100 publicly quoted companies. But it’s not the oldest.
Journalist Charles Dow created the first index more than 100 years ago. In 1896, Dow averaged the stock prices of the top 12 publicly-traded companies. He simply added their stock prices together and divided the total by the number of stocks and found that he could trace the movement of the overall market. Today, the S&P 500 index comprises the US's 500 largest companies having common stock listed on the NYSE.
Nasdaq started in 1971 and reached a peak in the heady days of early 2000. It then lost 80% of its value and it only now climbing back to its maximum of over a decade ago. However, even after the April fall, the Nasdaq still thumped the S&P 500 over three years, with a 78.2 per cent return compared with a 46.0 per cent return over the period.
There’s no doubt that, over the long term the technology sector is a picture of success. For the last 15 years the sector has boomed as tech companies' market has spread across the world. In the 1990s there were around 50 million PC users, but now there are at least a billion smartphone users - showing how far the potential market for tech firms has come.
This growth is directly reflected in the performance of technology funds and investment trusts. Morningstar data shows that every single technology-focused open-ended investment company, unit trust and investment trust listed on the London Stock Exchange made a profit over the last one, three, five and ten years. The average 10 year return is 89 per cent.
So what caused the April fall – and continues to make investors a little nervous? The answer is what the 'technology sector' actually encompasses. As one US commentator said: "There are now so many parts of the market, each with their own different dynamics.”
"For example, many people would typically include Facebook and Twitter under the technology banner when arguably they are better described as advertising companies, concerned with the movement of advertising dollars online.”
Further, one of the biggest risks with investing in technology businesses is that they are valued on their potential, rather than their actual profits. Fund managers and investors alike have to weigh up the "breakthrough" innovations and products – what will be disruptive in years to come.
Crystal balls at the ready.
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