There is no term so bizarre as "tech stocks." If you find yourself separating companies into tech versus non-tech, break this habit swiftly -- or you'll risk unnecessarily limiting your portfolio.
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It's not one industry
Investors may hear the term "tech stocks" and think of the high-flying companies that scarred millions in the Tech Bubble at the beginning of the century -- but so many different companies fall within the realm of technology. The classic FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are certainly quintessential technology companies, but there are plenty of other ways to invest in technology.
The entire tech sector can be broken into two very different, relatively broad categories: Software and hardware. Hardware companies create the physical devices that we use day in and day out. Software companies are responsible for all that makes the hardware function. This division alone shows the variety of companies that fall within the tech sector: A chip manufacturing company makes a very different product than the company that makes the operating software for your laptop.
There are even more industries within the division of hardware versus software: Data centers, semiconductors, personal computing, artificial intelligence, virtual reality, and the Internet of Things, to name a few.
These industries may appeal to completely different investors, so don't fall into the common mistake of comparing disparate companies simply because each depends on technology. Their relative merits also depend on what you're looking for as an investment.
For investors seeking a stable business, Apple and its growing dividend might be right for you. If you're a more growth-oriented investor, there are plenty of businesses in their early stages, such as real estate disruptor Redfin (RDFN +0.00%). Investments in technology run the gamut, even offering potential value plays such as legacy software provider IBM. Technology is an investing microcosm unto itself, so don't lump its wonderful opportunities into one group.
What's wrong with technology anyway?
Saying "I own too many tech stocks," blinds you to countless opportunities. Instead of viewing tech as one investment category, think of technology as a company's ability to disrupt. Technology is a differentiator that gives a company an edge over the competition, and makes life easier for its customers --- we still aren't very far from the days where shipping and handling was a substantial fee that we'd have to pay in order to buy products we wouldn't get for weeks.
As Foolish investors, our job is to focus on the long game. Technology is the future, but it also offers a lot of amazing business models in the present. Tech-focused companies tend to be able to expand more rapidly than their non-tech-oriented peers, giving them a leg up on the competition. Companies like Redfin, which exist entirely online, can leverage their internet-based platforms to grow faster than their competitors, who are tied to physical offices and all their attendant expenses. Redfin passes the savings on overhead costs on to customers as lower commission rates, which in turn saves its customers thousands.
The SaaS (Software-as-a-Service) model is another example where "tech stocks" have an edge for the foreseeable future. Where it once charged users a hefty sum for one-time software purchases, Adobe (ADBE 0.02%) now sells its software via subscription. This makes life easier for customers who don't want to pay thousands of dollars for software up front, while Adobe gets predictable recurring revenue. Companies that are more able to disrupt the status quo and improve the lives of their customers tend be great investments -- and let's face it, we aren't moving away from technology any time soon.
We need technology in all its forms
Technology is not a single industry. If you treat all tech-focused companies the same, you are limiting yourself. Comparing Apple to Redfin is comparing apples to oranges, and you should assess them very differently. Redfin is much earlier in its growth story than Apple, so if you are going to invest in the real estate disruptor, start with a much smaller position than you would with Apple -- preferably less than 2% of your overall portfolio.
If you still believe your portfolio is too tech-heavy, invest in whatever allows you to sleep comfortably --- maybe an index fund like the S&P 500. Just remember that a wide variety of companies use technology to make the world a better place for their stakeholders, and their diversity of business models and growth prospects have something to offer for nearly every investor, no matter what your priorities or risk tolerance might be.
