Does any single industry sector tend to produce more opportunity – and sheer anxiety -- for investors than the technology space?

No less of a stock-market authority than Berkshire Hathaway’s (NYSE:BRK.A) Warren Buffett, who has historically avoided the volatility of tech stocks, has found at least one to love: IBM. As of last September, Buffett had spent about $10 billion to accumulate a 5.4% stake in the IT consulting and services company. Unlike many newbie tech concerns, IBM has produced reliable earnings with profit margins and return on equity steadily increasing during the last five years. Buffett started acquiring the shares at about $159; he typically holds investments for at least 10 years. 

But what about you and your investment goals?

The siren song of technology can be hard for a lot of us to resist. After all, this is the group featuring such juggernauts as Netflix (Nasdaq:NFLX), growth stories as Facebook (Nasdaq:FB) and highflyers like Apple (Nasdaq:AAPL). Throw Twitter (NYSE:TWTR) into the mix and the potential for volatile results immediately increases.

George Middleton, who manages about $90 million at Limoges Investment Management in Vancouver, Wash., said: “We typically don’t have individual technology stocks in our clients’ portfolios. We wouldn’t pick Twitter and Facebook, just because of the volatility. I wouldn’t touch Netflix because it’s a speculative stock and it can go way up or way down. Apple? Same sort of thing. You just never know when to jump on the bandwagon.”

“Every investor is totally different,” Middleton said. “You can’t just throw out a number. This has more to do with the individual’s risk tolerance. That is why it’s better to be diversified. In 2000, the Nasdaq was the hot thing, but people got decimated in the problems.”

Susan Elser, a financial planner with Elser Financial Planning in Indianapolis who has about $90 million in customers’ assets under management, also urges caution. "Clients are always excited by what they hear in the news," she said, then signed audibly over the phone. “Two years ago, it was gold," she said. "Five years ago, hedge funds and 10 years ago, it was limited partnerships. The circus comes to town every year. My job as an advisor is not to chase the shiny object but to have a disciplined approach. I have to keep reminding people that technology is not always the safest thing.”

It boils down to one key question: How much risk can you stand in your personal holdings?

Investment advisor Elser said that she likens investing in technology issues to the notion of “making a bet.” She added: “I try not to encourage my clients to make ‘bets’ on the stock market because of the volatility swings. A diversified portfolio is a safer idea.”

Still, it’s hard for some investors, for instance, to forget that Netflix was the hottest stock in the market during much of this calendar year. By the time Facebook reported its quarterly earnings in late October, its shares had nearly doubled since it reported second quarter earnings in July.  

So, what’s the best way to invest in tech stocks?

Steve Ahearn, who oversees clients assets of $250 million at Wealth Management Advisors in Tewksbury, Mass., said it is wise to invest in tech stocks as a “passive investor,” suggesting that mutual funds that have large-cap tech components might be a sensible way to go. “It is a more efficient idea for a lot of people,” Ahearn said. 

Thomas Cloud Jr., the president of Eleven Two Fund Management in Marietta, Ga., who has about $14 million in clients assets under management, said, “For me, it depends on timing – what time is it in the economic cycle? A few years ago, the stocks that I bought for my clients were energy stocks, and before that, homebuilders because those were the best stocks going. I evaluate companies partially on their financial stability, income statements, balance sheets, and how the company is priced on the market. It’s like buying real estate – you can’t put a price only on the amount of the square feet. What about the quality of the school district?”

Cloud said he currently has invested about 25-to-30% of his clients assets in technology stocks - the most ever - primarily in the information-technology sphere. He likes the tech companies with "strong balance sheets and the ability to grow revenue.” Some of his favorites are LSI Corp ​(Nasdaq:LSI)., Activision (Nasdaq:ATVI) and Apple, though he has heard the skepticism around the latter company. Since he assumed an Apple position on November 17, 2011, the stock is up approximately 38%.

While that's an impressive return, Cloud added: “Some people gained 200% or more on Apple!”

Ah, spoken like a true investor!

The Bottom Line

Cloud’s statement above neatly sums up the conundrum of investing in tech stocks. It seems like certain stocks can always generate better returns than you are getting now. So, these stocks are forever tempting. Remember, there are no sure things in the stock market.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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