To Tech or not to Tech?

Finance
Tech or not to Tech

I believe that humans are competitive by nature. It is one of the driving forces that got us this far, it is one of the fundamental reasons why sports exist and is followed by so many. We like to win and on a playing field with defined boundaries we tend to optimise and perform at our peak within the set rules and the boundaries.

This is the same with investing, we hate missing out and love making that one good investment. Some would call it greed, but for some of us I think there is far more to it. The fact that we could have done better, not compared to other specific investors but compared to our own potential performance. We all have a certain drive inside us. I am totally in for slow and steady gets you there where discipline and consistency are far more effective. But what if your investments can be a combination of the tortoise and the hare? Let’s start with a disclaimer: I am not a qualified financial advisor/analyst and the below is purely my opinions and take on this matter.

My Benchmark

I have a long love of the S&P 500. There are many reasons for this. It consists of great companies, with diverse international earnings, across multiple industries, with a great track record of growth and decent dividends just to put the cherry on the top. There are also some more emotional and phycological reasons like even the oracle himself proving its long-term performance.

It is for this reason that I have about 15% of my international portfolio in an S&P 500 ETF and have a monthly recurring payment into a local S&P 500 tracking ETF for cost averaging. All of these investments have a long-term horizon and this is where the index normally does not disappoint. A while ago there was a podcast on just one lap asking if there is one ETF to rule them all? I was almost shouting at my car radio just buy S&P 500 (SPY, IVV, VOO etc), or if you want even more diversification throw in some VXUS as well just for good measure. Markets are made in the US and having a split between these two will give you great diversification and good growth potential.

So even with this view I still ask myself, should I not do better?

To Tech, or not to Tech?

I am also a big fan of tech. Where I try to have 50% of my portfolio in ETFs and 50% in individual shares. I am not a day trader and if I buy a share or ETF I do not plan to sell it any time soon. Of the tech shares I own some has done exceptionally well and that makes you wonder if there is not potentially more to it. So, using the S&P 500 (SPY) as benchmark I looked at the historic performance of certain ETFs. For the comparison I used the pure tech XLK ETF, the tech-heavy & quite complicated Nasdaq QQQ as well as a personal favourite MGK which is in the worst description possible: is a mix of these and SPY. The comparison does not include dividends but from a total investment return it would not really make a blip with these price movements. Over 5 years the story really tells itself (charts curtosy of investing.com).

QQQ being the clear winner by a large margin. What is interesting is that although XLK is quite consistently outperforming the S&P 500 over this period it is not always the case vs MGK, although the recent boom just killed it. Even over 10 years the story is very much the same. What can be seen is that during the downturn SPY was falling less than the rest, but over the long-term this had a negligible impact on the return and only looks good on the volatility rating.

The real question however is how much fuel is left in the tech tank? Can tech potentially have another 10 years like this or at least not perform worse than SPY? I can hear the calls of did you forget the dotcom bubble and fall of the Nasdaq? But truly the tech giants look far different from what they did back then with well backed and consistent earnings and not the same crazy P/E’s, especially if evaluated in detail.

On the flipside does SPY not have enough tech exposure with these large market caps taking up so much of the index? Then competitive me comes out asks: Can I not do even better?

Greedy

Enter the ring the big guns. Why not just buy directly into these companies? Looking at some of my personal favourites Apple (AAPL) and Amazon (AMZN) the chart will make any opportunity cost person shed a tear.

I mean are these companies not already big enough to just chug along? The key difference that can be seen is that although they make the rest of the field feel like Trump’s last person he fired they go about their business very differently. AAPL is the steady giant who grossly outperforms with less volatility over the long term and even providing a dividend these days. AMZN is the not so stable but just as smart sibling who after its biggest quarterly loss in 2014 have went on only to make the rest of the family jealous.

My personal opinion is that both these companies still have a lot left in them and will still be at the forefront of innovation for some time due to various reasons. But you never know they could be the next Microsoft that after its 1999 share price peak only reached the same levels again in 2016 after a reinvention of itself.

In summary my belief is that you must have a line in the water to catch a fish. You can have a bit of the hare in the mix especially with a long-term view. You can also have a bit of tortoise (although that is a slap in the face description of my beloved S&P 500 taking its performance into consideration) and a bit of in-between. The crux lies in the weighting of the hare and the tortoise for your risk profile and investment horizon.

Let’s take stock in 5 years and check back in 10 years to see how it panned out.

Always grow your wealth for tomorrow while being content with your wealth today.

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