The biotech company that's able to deliver the next game-changing treatment might become tomorrow's winner -- and offer your portfolio a giant boost.
Problem is, it's not always easy to identify that company. And even if you do pick a company ready to flourish, it could hit a roadblock, causing the shares to sink. An example: Novavax surged more than 2,000% in 2020 on optimism about its coronavirus vaccine program, then plummeted as it fell behind in the vaccine race.
But here's the good news: You don't have to pick just one winner to succeed in biotech investing. There are many ways to put your money into this innovative industry and come out ahead in the long run. Let's take a closer look at why you really shouldn't focus on only one stock -- and find out what to do instead.
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There are more than 900 biotechs to choose from
More than 900 biotech companies are publicly traded and brought in a total of $242 billion in revenue in 2021, up by 50% from the previous year, according to Nature Biotechnology. Biotech includes established, profitable players like Vertex Pharmaceuticals and Regeneron Pharmaceuticals, which last year posted nearly $9 billion and $12 billion in revenue, respectively.
And biotech includes younger players that aren't yet generating product sales but make attractive investments due to an exciting pipeline that could lead to blockbuster revenue down the road. Within biotech, technologies multiply, from mRNA platforms that instruct the body to produce disease-fighting proteins to gene-editing techniques that fix faulty genes responsible for disease.
All of this can seem overwhelming and make it extremely tough to choose one winning stock. And the risk is that you may be tempted to jump into the latest biotech trend, which may not necessarily represent the best investment over time.
But don't worry -- you have several options to increase your chances of benefiting from your biotech investments. First, you might consider buying a biotech exchange-traded fund -- such as the iShares Biotechnology ETF (IBB 0.65%) -- that owns shares of hundreds of top stocks in the industry. ETFs broaden your opportunity for gains and reduce your risk, since you're not just betting on one player. An ETF won't soar by more than a thousand percent overnight, but it is likely to deliver steady gains over time.
Profitable biotech companies
Another possibility is buying a basket of biotech stocks, and you can adapt this to your comfort with risk. For example, if you're a cautious investor, you may choose to invest in only profitable biotech companies. If you're more comfortable with risk, you might add in some players that don't yet have product revenue but are developing promising candidates -- and could become tomorrow's success stories.
You can use this basket approach when it comes to technology too. For instance, if you're interested in gene editing, you might decide to invest in a few companies working in this exciting field rather than just one.
When investing in a newish technology, though, be aware of the risks. If the technology itself disappoints, all of these stocks could suffer. So this approach is best left to aggressive investors.
Now, here's how to get started with your winning biotech strategy. Since you've wisely decided not to count on one stock alone to make you millions, favor spreading your investment across several players -- or opt for an ETF. You can even combine both ideas by investing in an ETF and a few individual biotech stocks. By doing this, you're more likely to win than if you bet the farm on just one company.
Also, as you get started, consider this: Always go into investing -- in biotech or another industry -- with a long-term mindset. By investing in a company or companies for at least five years, they have the opportunity to grow and deliver on their promises, and you'll have the opportunity to benefit. Everyone says patience is a virtue, and in investing, it not only is a virtue, but it also could be the key to growing wealth over time.