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Tech Investing: Exploring the Sector’s Promising Potential

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Tech Investing

tech investing

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Exploring the Potential of Tech Investing

Technology stocks have had impressive momentum. In the first 9 months of 2020, the S&P 500 Information Technology sector had a total return of 28.69%—far exceeding the S&P 500’s total return of 5.57%.

What should investors know about participating in this trending sector? This graphic from New York Life Investments covers tech’s long-term performance, the broad tech universe, and what investors should consider when analyzing tech investments.

Tech’s Performance

Since most tech companies are internet-based, COVID-19 has caused minimal disruptions to their business operations. In a number of cases, tech companies even saw sales growth as they benefited from consumers going online during lockdown.

Over a longer timeframe, however, tech’s performance is quite varied.

 S&P 500 Information TechnologyS&P 500 
201010.19%15.06%
20112.41%2.11%
201214.82%16.00%
201328.43%32.39%
201420.12%13.69%
20155.92%1.38%
201613.85%11.96%
201738.83%21.83%
2018-0.29%-4.38%
201950.29%31.49%

Data based on total returns.

Tech underperformed the general market in 2010, 2012, and 2013. However, the sector has outperformed every year thereafter.

In total, investors who held tech stocks over the last decade would have been rewarded. The 10-year annualized return for the S&P 500 Information Technology index was 20.50%, compared to 13.74% for the S&P 500.

The Tech Universe

While the information technology sector is commonly used to represent tech stocks, the broader tech universe can be broken down into 4 business types:

  • Software – such as application software, fintech, and cybersecurity.
  • Hardware – such as electronic equipment, semiconductors, and self-driving cars.
  • Internet Information – such as social networks, e-commerce, and digital advertising.
  • Telecommunication – such as internet services, telephone operators, and cable companies.

In addition, there are other companies that don’t fit neatly into these categories. This includes businesses involved in biotechnology, blockchain, or even retailers with modern technology such as mobile payment systems.

What Investors Should Consider

There are many factors to consider with tech investing.

  1. Diversification
    To lower potential risk, investors can diversify across industries, geographies, and individual companies. Tech investing should also be part of a broader portfolio strategy.
  2. Risks and opportunities
    Tech stocks have unique risk factors, such as regulatory risk arising from data privacy and antitrust concerns. However, they also present specific opportunities: new applications of technology are always being discovered. For example, GPS was originally used by the U.S. Navy to track submarines, but is now used for things like ridesharing.
  3. Personal objectives
    Investors can consider whether they are seeking growth or income. Growth investors can look for newer companies with high growth potential. Income investors may seek mature companies, some of which offer dividends.
  4. Company financials
    It can be tempting to get swept up in the news hype of a particular company. Instead, investors can pay close attention to company financials and reporting to ground their interest in reality.

With all this in mind, how do the sector’s risks measure up against its returns?

Potential Risk/Reward Payoff

Tech stocks have historically been more volatile than defensive sectors, such as utilities and consumer staples. However, they have also generated higher returns relative to their risk level.

Annualized risk-adjusted returns

 3-yr5-yr10-yr
S&P 500 Information Technology1.371.491.28
S&P 500 Consumer Staples0.650.781.06
S&P 500 Utilities0.520.760.84

Risk is defined as standard deviation, calculated based on total returns using monthly values.

By understanding the landscape and what to look for, investors will be poised to take advantage of tech’s potential.

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Infographics

The Top 6 Infrastructure Investment Opportunities

Based on funding from the Infrastructure Investment and Jobs Act, this graphic explores the top 6 infrastructure investment opportunities.

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Infrastructure Investment

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The Top 6 Infrastructure Investment Opportunities

The U.S. government is putting a focus on infrastructure investment. For years, the country’s infrastructure—critical structures and facilities like roads, power supplies, and internet access—has been in poor condition.

Now, the government is pledging billions of dollars in funding. In this graphic from New York Life Investments, we explore how this public commitment translates into six potential infrastructure investment opportunities.

Breaking Down the Infrastructure Investment and Jobs Act

The Infrastructure Investment and Jobs Act was signed into law in November 2021. It includes nearly $550 billion in new investments.

CategoryInvestment Amount
Transportation$283.8B
Broadband$65.0B
Energy & Power$65.0B
Water$63.3B
Climate & Cybersecurity Resiliency$47.2B
Environmental Remediation$21.0B

Based on these commitments, here are the six categories that present potential infrastructure investment opportunities.

1. Transportation

52.0% of new government funding

Because infrastructure has been underfunded for some time, transportation systems are in a state of disrepair.

  • 43% of roads are in poor or mediocre condition
  • 231,000 of the country’s 617,000 bridges are in need of repair or preservation work

New government funding will enable the expansion and repair of transportation infrastructure.

The infrastructure investment opportunity: Funding could increase revenue and provide stable long-term contracts to engineering, materials, and construction companies.

2. Broadband

11.9% of new government funding

Millions of Americans don’t have access to broadband (high speed) internet, and the number of people who don’t use it is even higher due to affordability issues.

  • People without access: 14.5 million
  • People who don’t use broadband: 120.4 million

New government funding will increase access and help reduce prices.

The infrastructure investment opportunity: Funding could boost the customer base and revenue of internet service providers.

3. Energy & Power

11.9% of new government funding

The U.S. has set a goal to have net zero emissions by 2050, yet the country gets most of its energy with fossil fuels.

SourcePercent of U.S. Energy Consumption in 2020
Petroleum34.7%
Natural Gas 34.0%
Renewables12.5%
Coal9.9%
Nuclear8.9%

New government funding will help build electric power transmission lines and facilitate clean energy technology.

The infrastructure investment opportunity: Funding could boost the revenue of utility, manufacturing, and renewable energy companies.

4. Water

11.6% of new government funding

U.S. water infrastructure is aging, with 14-18% of potable water lost through leaks. The annual costs of wasting this treated water is projected to increase from $7.6 billion in 2019 to $16.7 billion in 2039.

New government funding will modernize water infrastructure, invest in water storage and recycling, and remove lead pipes.

The infrastructure investment opportunity: Funding could boost the revenue of engineering firms and companies that build, install, and repair water pipes.

5. Climate & Cybersecurity Resiliency

8.7% of new government funding

Climate disasters and cyber attacks are leading to increased costs & destruction of infrastructure. In 2020, there were 22 U.S. climate disasters that each cost over $1 billion in damage—with a total cost of $100 billion.

Type of DisasterCost in 2020
Tropical Cyclone$57.5B
Severe Storm$35.5B
Wildfire$17.3B
Drought$4.7B

New government funding will invest in protection against cyber attacks, floods, droughts, and other climate disasters.

The infrastructure investment opportunity: Funding could boost the revenue of companies involved in cybersecurity, weatherization, environmental consultation, and construction.

6. Environmental Remediation

3.9% of new government funding

Contaminated sites are causing environmental harm or hindering land reuse, and there are more than 450,000 of them across the country. New government funding will clean up contaminated land, reclaim abandoned land mines, and plug orphaned oil and gas wells.

The infrastructure investment opportunity: Funding could boost the revenue and long-term contracts of environmental remediation companies.

Public Funding, Private Infrastructure Investment Opportunities

A boost in government funding is likely to create increased activity in private infrastructure-related areas:

  • Engineering
  • Construction
  • Materials
  • Internet Service Providers
  • Clean Energy Tech
  • Pipe Installation
  • Cybersecurity
  • Environmental Consultation

By paying attention to where the money is going, investors can consider a variety of categories that provide critical services—and capitalize on upcoming trends.

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Infographics

What Retirement Barriers do Americans Face Today?

Retirement barriers are making it difficult for people to feel good about their future. See how advisors can help in this infographic.

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What Retirement Barriers do Americans Face Today?

Today’s definition of retirement is much different than before.

It’s no longer a postscript to career, but instead a time to enjoy freedom. This could be the freedom to learn new hobbies, the freedom to travel, or the freedom to start an online business. Unfortunately, this freedom is proving to be difficult to achieve for most.

In this infographic from New York Life Investments, we discuss the retirement gap—what it is, why it exists, and how advisors can help reduce it.

What is the Retirement Gap?

New York Life Investments partnered with AARP to survey over 3,000 Americans about their retirement plans. They uncovered that across all ages, there was a gap between i) people’s perceived importance of retirement planning, and ii) their actual preparedness.

Age groupPerceived importance of preparing for retirementActual preparedness
20s77%45%
30s87%41%
40s87%40%
50s92%47%
60s93%58%
70-7484%70%

Based on a survey of 3,025 Americans aged 20-74.

These results suggest that the status quo around retirement planning isn’t working for most people. This is further supported by other survey findings. For example, 65% of respondents said they didn’t feel optimistic about retirement.

What Barriers do Americans Face?

The survey determined that Americans are struggling to overcome five retirement barriers. Let’s hear from survey respondents to learn more about them.

#1: Managing multiple priorities

Juggling between retirement savings and more immediate needs such as childcare can lead to emotional overwhelm.

”It’s difficult to put substantial money in a 401 or IRA while also paying off debt at the same time.”
– Alex B. (20s)

#2: Figuring out how much is enough

Uncertainty about how much savings is needed causes many people to avoid retirement planning altogether. The problem can simply feel too large to tackle.

”Retirement and aging are not things I look forward to, mainly because of the lack of preparation and fear of the unknown.”– Janet F. (50s)

#3: The complexity of resources

Many Americans find retirement resources are too difficult to understand. This issue is related to a lack of financial literacy, which happens to be a growing problem in the United States.

”They don’t break it down into where you can understand it.”– Amy E. (40s)

#4: Lack of representation in the marketplace

People feel that available resources are not speaking to them, or are not relevant to their life circumstances. This type of “alienation” can discourage people from seeking professional advice.

”I don’t see people who are anything like me. I see representations of upper management people…and I know that won’t be my reality.– Penni B. (60s)

#5: Don’t know who to trust

People feel that the financial industry does not have their best interests in mind. They often seek information from sources who seem more like “them.”

”I avoid professionals because I hear so many stories of financial planners who cheated people in their investments. I believe in some of the people I follow on YouTube more.”– Dino M. (50s)

Bridging the Gap

Altogether, these barriers highlight a disconnect between who the market is targeting, and who is most in need of help. Financially advisors have the power to bridge this gap by doing two things.

The first is to view investors as “customers for life”. Large firms often push advisors to work with clients who have a greater level of assets—typically those in their 40s or older. This could create a major challenge for younger generations who hope to one day retire.

For example, survey data shows that people’s expected retirement age increases as they grow older. This suggests that young adults are struggling to develop the right financial plan for their needs.

Age of respondentExpected retirement age
20s55.7
30s60.7
40s64.6
50s64.9
60s67.8

Based on a survey of 3,025 Americans aged 20-74.

By viewing investors as “customers for life”, advisors have the opportunity to steer people onto the right path at an earlier age. This can help them create positive impact in their communities, as well as grow their business through word-of-mouth marketing.

The second thing advisors can do is reach out to underserved communities. Data shows that Black and Hispanic Americans are less likely to have retirement savings, while those that do feel much less confident.

EthnicityHave retirement savingsPerceive retirement savings as being on track
White80%42%
Black63%23%
Hispanic58%22%
Asian85%47%

Source: Statista (2021)

Up to this point we’ve focused on the financial aspect of retirement, but what about health & wellness?

Redefining Retirement: Health, Wealth, and Self

The rising importance of personal health has been a major phenomenon of the COVID-19 pandemic. According to McKinsey, 48% of Americans increased their prioritization of wellness compared to 2-3 years ago.

This shift in thinking must also be reflected by retirement plans. One way to do this is to integrate health & wellness considerations alongside wealth.

For example, poor physical health can significantly drive up the costs of retirement. In fact, the average American aged 65-84 already spends nearly $17,000 per year on healthcare.

Mental health, on the other hand, can be severely affected by money-related stress. Symptoms include a loss of sleep, high blood pressure, and a negative impact on personal relationships.

Perhaps most interesting is that the relationship between health and wealth goes both ways. In other words, wealth can be a driver of better emotional and physical health. The following table shows how individuals with greater income felt better about their wellbeing.

Income levelConsider themselves to be emotionally healthyPhysically healthy
Under $40K50%47%
$40K - $75K63%56%
$75K - $100K68%63%
Over $100K73%68%

Based on a survey of 3,025 Americans aged 20-74.

To develop a more holistic retirement plan for their clients, advisors must transform from financially focused representatives to holistic life coaches.

Barriers are Meant to be Broken

With the concept of retirement, many Americans feel like they are on the outside looking in. They suffer from a lack of representation, a mistrust for the financial industry, and have few resources that are catered to them.

What’s needed is a democratization of retirement planning.

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