Holding Out for the Tech Recovery

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In 2000, I put $2,500 in a tech fund. Should I add more now in hopes of recovering my losses quicker?

QUESTION: I put $2,500 in the Strong Technology 100 (STEKX) fund in 2000. Since that time, the fund has fallen significantly. I plan to hang on, in the hope of one day breaking even. Would it be foolish to contribute a small amount to the fund each month, in order to make up my losses quicker? I don't need the money now, and if I lost it all, it wouldn't be a big deal. Do you see the tech sector recovering in five to 10 years?

ANSWER: We hate to accentuate the negative here, but even with the strategy you propose, you might have to wait a long time to see your tech investment turn a profit. Since the beginning of 2000, the Nasdaq composite is down roughly 68%. While we don't know the exact returns of your tech fund, we can safely assume you have a very deep hole to climb out of.

Nevertheless, your idea of dollar-cost averaging could indeed improve the situation. By employing this method, you'd reduce the average cost basis of your shares, which would allow you to benefit from a tech turnaround more quickly -- whenever that blessed day arrives.

To know whether this is the proper course of action, however, you need to take a step back and evaluate just how much tech belongs in your portfolio. If you haven't done so already, now's a good time to review your asset allocation. Generally speaking, you shouldn't invest more than 5% to 10% of your portfolio in a specific sector fund. You should also keep in mind that if you hold any growth funds or even a Standard & Poor's 500 index fund, you may already own more tech stocks than you realize, says Christopher Traulsen, senior analyst with investment-research firm Morningstar. Back in the late 1990s, technology companies comprised 30% of the S&P 500. Today it's a more modest 18% -- but given the sector's steep losses, a little goes a long way.

Whether or not you decide to stick with the Strong fund over the long haul, we'd advise you to sell your shares immediately. How's that? By selling, you can harvest your loss and reduce your taxes, explains Joel Isaacson, a certified financial planner (CFP) and certified public accountant (CPA) based in New York City. (For all the nitty-gritty details of this maneuver, click here.) If you want to repurchase your Strong fund, you must wait until 30 days have passed to avoid the dreaded wash sale rules. Alternatively, you could immediately buy a different tech fund (click here for our latest picks) or a more diversified growth fund, without worrying about these tricky tax regulations. Dollar-cost averaging into your fund of choice now would make sense for the reasons described above.

So when will tech start to recover? Few experts are expecting a turnaround in the near future -- particularly now that the economic recovery is taking longer than many anticipated. "We're unlikely to see a significant increase in information-technology spending until 2003, and it may be the middle of 2003 rather than early 2003," says Charles Smulders, chief analyst for Gartner Dataquest. Even then, we aren't likely to see the kind of growth that we saw in the late 1990s. While over the short term a tech turnaround is tied to the economy, for dramatic long-term growth we need to see widespread adaptation of new technologies -- as we saw with PCs and cell phones. "As I look out over the next five to 10 years, I don't see interesting new devices or applications that would trigger a big adoption cycle that's going to create extraordinary growth," says George Gilbert, co-manager of the Northern Technology fund (NTCHX). After all, the Internet can be invented only once.

There's also some question as to whether technology companies are overvalued. In his latest commentary, Ed Yardeni, chief investment strategist at Prudential Securities, noted that the IT sector is still selling at a rich premium to the S&P 500's market multiple (on a forward price/earnings basis), whereas "prior to 1998, tech traded at the same multiple as (the) market's." Nevertheless, with P/Es down significantly from 1999's highs, there should be an opportunity for today's long-term investors to make money in the future, says Gilbert, who expects technology to outperform the broader market over the long term.

Translation? Even with the protections of dollar-cost averaging, fragile investors need not apply. Granted, you've set the bar pretty low by saying that if you lost all of your tech investment, it wouldn't be a big deal. But let us remind you that the goal here is to make money, not to lose it. A good way to start would be to restrict your investments to those you have some real faith in over the long term.