After a decade of virtually no returns -- thanks in large part to the bursting tech bubble in 2000-2001 and the Great Recession of 2008-2009 -- technology stocks roared higher in the 2010s. As measured by the Vanguard Information Technology ETF (VGT +1.53%), the sector gave investors a total return (share price appreciation plus reinvested dividends) of 398% over the last 10 years, including a 55% rally in 2019 alone.
Of course, that's the index overall. The best-of-the-best tech stocks did even better, some even returning over 1,000% over the last 10 years. With a new year and a new decade here, there's no need to worry that the boat has been missed. 2020 is a great time to add tech stocks to your portfolio -- especially if you plan on holding them for the next 10 years or more.
Technology is still leading the economy forward
One of the big technology investing themes of the 2010s was cloud computing -- digital services delivered from a remote data center to an end user via the internet and led by the likes of Amazon (AMZN 1.15%), Microsoft (MSFT +1.03%), and Alphabet's (GOOGL 0.49%)(GOOG 0.54%) Google. While the cloud is well developed now in the U.S. and other developed markets, the rest of the world is still playing catch-up. Thus, the cloud investing thesis is still a solid one, expected to be a double-digit growth industry for the foreseeable future.
As growth in the cloud slows down here in the states, though, it's beginning to fuel new technological innovation. According to researcher Gartner (IT 2.64%), new tech trends like edge computing, automation and artificial intelligence (AI), blockchain, and autonomous machines and robotics will take over as the primary drivers of IT spending. In fact, after global IT budgets ended 2019 roughly flat with 2018 (blame the trade war between the U.S. and China), Gartner expects a 3.7% rebound in 2020 global IT spending.
I know 3.7% doesn't sound like much, but bear in mind that global GDP is expected to be in the 3.5% ballpark in the next year. Plus, the annual amount spent on technology was pegged at $3.7 trillion in 2019. Thus, even a low single-digit growth figure means lots of new dollars to go around, with the aforementioned emerging growth trends capturing the lion's share of them. And that's the beauty of the technology industry: Something new and exciting always emerges to take up the torch and lead the economy forward.
Image source: Getty Images.
Disruptors need less babysitting than the disrupted
Another trend from the last decade was disruption. Tesla (TSLA 0.44%) CEO Elon Musk famously said on an earnings call in 2018 that "moats are lame" -- that a well-established and seemingly bulletproof business is no longer a good strategy. Innovation, especially that which is disruptive to the status quo, is the better route to go.
While many defend and still look to invest in businesses that are hard to disrupt, there's no denying that some of the best investments of the 2010s were technology stocks -- and specifically ones that changed business and consumer behavior (such as Netflix (NFLX 0.75%), for example). Many researchers and analysts agree that the world is in the early innings of another round of rapid societal change driven by technological advances. Dubbed the fourth industrial revolution by World Economic Forum founder Klaus Schwab, this new wave of advancement is being driven by internet mobility, AI, and automation. In other words, if you believe the world is and will continue to undergo rapid change in the years ahead, disruptive business models should continue to do quite well and cause headaches for those organizations slow to adapt.
While there are other ways to invest in an evolving economy and society at large (like businesses that are putting tech to work for them the most efficiently), tech stocks are the most direct route and purest play to get in on the movement.
Valuations aren't totally unreasonable
Of course, investors should still use discretion regarding which technology stocks to buy in 2020, or at any other time. Remember the tech bubble that popped during the early 2000s? Investors who didn't steer clear of bad internet-based companies with practically non-existent business results had a rough go of things for a few years.
As the saying goes, history rarely repeats itself, but it often rhymes. Many tech stocks do indeed look frothy once more after big double-digit returns in the last year, although with a twist this time around. Many upstarts -- software-as-a-service companies, most notably -- haul in quite a bit of revenue. However, to try and maintain their double-digit momentum, these companies pile their profits back into the business with aggressive sales and marketing efforts. Put simply, the strategy is "grow now and profit later." The payoff could be huge, but as 2019 demonstrated with many busted initial public offerings, the transition from maximum expansion to profitable expansion can be difficult (WeWork, anyone?). Know what you're buying, and understand a company's strategy to eventually get profitable before making a buy.
Still, it isn't all bad out there. The S&P 500 index currently trades for a lofty 25.2 times trailing-12-month earnings -- thanks in part to heavily weighted and premium-priced names like Amazon, Microsoft, and Google -- but the trailing-12-month P/E for the Vanguard Information Technology ETF is just a bit over that, at 26.6. Speaking in relative terms, it's not a huge premium for the fastest-growing sector of the economy.
Thus, adding tech stocks to your portfolio in 2020 isn't a bad idea. Bear in mind there will be some bumps in the road this year, just as there have been in times past. Nevertheless, for investors who have time on their side (at least five to 10 years), buying technology will be a rewarding resolution to make.
