How Technology is Becoming the Most Important Sector
When designing an investment portfolio, diversification is a critical component. Holding stocks in various sectors helps mitigate risk without compromising returns. But not all sectors are created equal. Depending on where the business cycle is at, certain sectors may outperform or underperform the broader indexes.
Cyclical industries behave in patterns that are relatively easy for investors to predict. Other sectors such as pharmaceuticals and biotechnology aren’t correlated with the markets at all and follow their own microeconomic patterns. The best portfolios usually have a representative from most, if not all sectors of the economy but one sector seems to be taking over in terms of importance to other stocks and the market in general.
In the past five years, the S&P 500, an index made up of 500 stocks from various economic sectors, has risen about 78%. Over that same time period, the NASDAQ, an index known for its strong grouping of tech stocks, has gained more than 132%. It’s clear that the technology sector is becoming more than just another sector of the global economy – it’s becoming the defining sector.
The new technological paradigm
There are certain moments in history when a business or idea changes the way we look at the world. These disruptors often cut a path of destruction for those companies that aren’t able to adapt in time but create opportunities for others.
There’s a list of industries that are either defunct or at the very least on their way out thanks to technological disruptors. Paper has given way to electronic forms of communication, coal is becoming obsolete in the face of cheaper, cleaner sources of energy, and even space is becoming more and more accessible to commercial interests.
But while the world might be caught in a technological renaissance, not every new product is guaranteed to be a winner for investors. 3-D printing promises to be a huge benefit to sectors like biotechnology and manufacturing, but it’s not the 3-D printing companies that ended up on top, it’s the companies that adopted the technology for themselves.
The headlines constantly reveal technological breakthroughs that promise to be paradigm-altering by some of the biggest names on Wall Street like Amazon, Google, Apple, Facebook, Tesla and more. And while these giants lead the way, it’s the companies that will benefit from technology-inspired cost reductions and innovative new products that will soar higher over the next decade.
While technology is quickly becoming a vital part of every industry, investors should pay careful attention to industries that are set to benefit the most rather than directly investing in technology companies themselves. There’s a saying on Wall Street, “when everyone is digging for gold, it pays to be the one selling the shovels.” In other words, it may be the industries supporting the changing tides that will offer the most opportunities for investors rather than directly investing in the tech companies themselves. Still, for long-term investors, it might not be a bad idea to pick up a few shares of stock from companies like Amazon or Apple.