You can count on technology to keep changing. But can you count on it for retirement income?
As bad as the coronavirus has been for some areas for the economy, it’s been good for others. Many tech companies have seen their fortunes rise thanks to the pandemic. All this has spurred new interest in tech investing – but beware! The tech sector is notoriously volatile and challenging, and there’s a lot you need to know. Here we will cover: What the tech sector is and what’s in it; the best tech stocks right now; risks and challenges of tech investing; and tech investing for income.
Now, let’s talk about tech. Basically, any company that sells a product or service heavily dependent on technology is in the tech sector. But there are also smaller sectors based on the kinds of technology involved. For instance, there are hardware companies that build everything from servers to Fitbits. Then there are the software companies that design things like operating systems and cybersecurity software. There are the semiconductor companies, and there are the telecom companies that provide wireless service, video streaming, and cloud computing. By and large, most areas of the tech sector got a boost from coronavirus pandemic. Amazon has thrived as consumers have shifted hard toward e-commerce. Microsoft has also done well, along with Apple, Intel, Netflix, and AT&T, among others. Are these boosts permanent? Possibly. Or new companies might come along to make some of these goods and services obsolete. This highlights a major challenge of the tech sector: It’s always in flux because technology is always changing. You can say that about all market sectors, but the pace of change with technology tends to be rapid, and major events like wars and pandemics speed it up more.
With all this in mind, what are considered the hottest tech stocks for 2022? Not surprisingly, they include several of the companies I’ve already mentioned. The list includes Amazon, Microsoft, Apple, Intel, Cisco Systems, Netflix, Facebook, and Alphabet, the parent company of Google. As you might know, five of these companies are so dominant that they’re often grouped together as FAANG, which stands Facebook, Amazon, Apple, Netflix, and Google, aka Alphabet. As of last August, FAANG accounted for about 19 percent of the entire S&P 500. That just illustrates how dominant tech companies are. But, again, technology is always changing, and today’s market leaders can sometimes become yesterday’s news: Blockbuster, Napster, Compaq, Wang Laboratories, Sinclair, Polaroid – Those are just a few of the once-booming tech companies that ultimately went bust.
What makes tech investing so tricky is the same thing that makes all investing tricky: Your goal is to buy low and sell high. But, often, by the time a tech company is successful enough for you to easily recognize its value, its stock price is already high, so you’ve missed out. That’s why tech start-ups are always hot among speculative investors. Everybody wants to get in on the ground floor of the next Apple or Amazon. With that in mind, how might you – or a seasoned investor – pick the right tech companies? Well, for mature tech companies that produce profits, the price-to-earnings, or PE, ratio is a useful metric. For younger companies, revenue growth is a better gauge. Ultimately, a good tech stock is one that trades at a reasonable valuation relative to its growth prospects. If you expect earnings to skyrocket in the coming years, paying a high price for the stock can make sense. But if you’re wrong about those growth prospects, it may turn out to be a bad investment. In other words, it’s all about growth. But that doesn’t mean you can’t take advantage of the booming tech market once you’ve shifted your focus from growth to income.
In recent years, many of the top tech companies have implemented dividend policies as a way to reward shareholders and to show how confident they are about future earnings growth. This is great news if you’re an income investor with the right goals and the right risk tolerance. While the most conservative income strategies generate income through interest, higher-risk options generate dividend income. They’re considered riskier because investing in the stock market is generally always riskier than investing in the bond market, and because companies can cut or eliminate dividends at any time. In fact, many companies that were hurt by the pandemic did just that. But, as noted, most tech companies were helped by the pandemic, and several of them are considered good buys for dividend investors today, including Apple, Microsoft, Intel, and Cisco Systems. The bottom line is that, although technology can be one of the riskiest sectors of the entire market, it can also be one of the most lucrative. The good news is that you can continue taking advantage of its potential value while also trying to reduce your risk once you’re at or nearing retirement age. That’s when less-risk and reliable income should be your top priorities. The even better news is that those two priorities go hand once you have a strategy designed with the help of an income specialist.
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. Arbor Financial Services of Florida, Inc. and Sound Income Strategies, LLC are not associated entities. Arbor Financial Services of Florida, Inc. is a franchisee of the Retirement Income Store. The Retirement Income Store and Sound Income Strategies LLC are associated entities.