4. DON'T GET TOO ENAMORED WITH TECH:
Be careful not to load too much of your portfolio with tech stocks. The sector makes up 21 percent of the value of the S&P 500. If you invest in a fund that tracks that index, you already own roughly that same tech weighting in that fund. And many investors' tech exposure has grown because Apple's stock has surged, making it the world's most valuable stock, and the most commonly owned in fund portfolios.
5. MINIMIZE EXPOSURE IF YOU'RE WORRIED ABOUT VOLATILITY:
Tech stocks are more volatile than the broader market, so expect choppy returns. For example, tech funds were among the worst-performing stock fund categories last year, losing an average 8 percent. This year, they're the top performers, averaging returns of 17 percent. Credit a strengthening economy, and Europe's recent progress in controlling its debt crisis. Europe is a huge market for U.S. tech companies, so its economy is a big factor in the recently improved tech outlook. "Last year, there was a crisis of confidence," says Matt Sabel, manager of the MFS Technology Fund (MTCAX). "But this year, it became clear that the world wasn't entering a double-dip recession." However, expect tech to get hit hard again if the economic outlook deteriorates.
6. DIVIDENDS CAN INSTILL FINANCIAL DISCIPLINE:
Dividends force corporate managers to be cautious spenders. Sabel reasons that dividend-paying tech companies are less likely to dip into their cash stockpiles to make a risky acquisition, or launch an ill-conceived research project. Relative to non-dividend-paying tech stocks, dividend-payers are likely to deliver steadier returns.
"When that dividend check has to be cut every quarter," Sabel says, "it does focus management on cash flow, and sometimes that's a good thing."
Questions? E-mail investorinsight(at)ap.org