Investing in the right sectors is crucial when it comes to generating superior long-term returns for your portfolio, and the technology industry offers unparalleled opportunities for growth and innovation. No other sector has the same kind of dynamism in terms of creating new products with disruptive possibilities that the tech business provides.
However, competitive risks are always a challenge in such a dynamic sector; for this reason, investing in technology ETFs can provide a convenient alternative to capitalize on the industry´s growth potential while still keeping specific risks at bay thanks to the benefits of diversification.
Risk and Return in Technology
Warren Buffett is famously averse to investing in the tech business. The Oracle of Omaha has publicly stated that he doesn´t understand new technologies, and that´s why he stays away from the industry. Buffett likes to say things in a simple, unassuming manner, but there is some really profound wisdom in his words.
Buffett has been around long enough to see all kinds of promising technologies come and go through the decades. Investors in the tech industry can achieve amazing returns when positioned in the right companies: innovation is the ultimate driver of growth and profitability, and the tech industry is a particularly fertile ground for all kinds of ground-breaking products.
On the other hand, disruptive innovation can be a double edged sword as the winner of today can easily become the loser of tomorrow. At a company-specific level, the risks are always considerable when investing in the tech business.
Microsoft Corporation (NASDAQ:MSFT) used to be the undisputed leader in the industry a decade ago, when the company had a tremendously dominant position with its Windows operating system. This represented not only massive cash flows for investors, but also an enormously valuable strategic asset for the company.
But things change quickly in the tech business: the mobile revolution has been a big victory for Apple Inc. (NASDAQ:AAPL) and other companies, and Microsoft Corporation (NASDAQ:MSFT) is now in serious trouble as smartphones and tablets are gaining market share versus PCs and hurting Windows sales.
In a similar fashion, just when it looked like Apple Inc. (NASDAQ:AAPL) couldn’t do anything wrong, lower cost Android devices started rapidly gaining market share versus Apple Inc. (NASDAQ:AAPL) products in both smartphones and tablets. Investors in Apple Inc. (NASDAQ:AAPL) have seen the stock decline by more than 35% from its highs as growth has materially slowed down in the last quarters.