The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

CHAPTER 6

The Technology Sector

It has become appallingly obvious that our technology has exceeded our humanity.

Albert Einstein

The technology sector is composed of four major industry groups: computer hardware and storage, semiconductor, software, and Internet companies. This sector is the most volatile in the stock market. The players are sensitive to technological innovations and frequently are subject to competitive changes. Advances in computer processing, network bandwidths, and Internet functioning are the key drivers of the “information age.” In 2011, technology stocks represent 18.7% of the benchmark S&P 500 Index. This makes the sector the largest weight within the index. However, this large weight actually discounts the percentage from the beginning of the decade. As of January 1, 2000, the technology weight in the S&P 500 had grown to more than 30%. The NASDAQ exchange, composed mainly of technology companies, dropped 80% in value from March of 2000 to October of 2002. With the substantial drop of the NASDAQ since 2000, technology valuations are now more appropriate and in line with historical averages. Historically, the technology sector has delivered a 9.7% annual return over the 24-year period ending December 31, 2010. I expect that the technology sector will continue to deliver excellent performance over the next decade. Advances in this sector will depend on the continued advancement of the Internet and broadband services, global competition, and cellular technology. ...