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Boot up your returns with tech stocks?

Sector analysis » Boot up your returns with tech stocks?

Tech stocks are hot, thanks to innovations like smartphones, computer tablets and social media. But while experts are enthused about tech's future, they add that the sector's known for stomach-churning volatility and the occasional high-flying casualty. Here's what to look for, and what to watch out for.

Why it's interesting

For starters, think about how technology rules our lives. Less than a lifetime ago, computers were something used by corporations and the industry was so dominated by one company -- International Business Machines -- that the federal government deemed it a monopoly and filed an antitrust suit (later dropped) that could have broken up the company. That was the era when kids played games that frequently involved moving tokens and rolling dice. Music was distributed on vinyl discs called records, which were sold by businesses called record stores. Students did research by going to libraries and looking through a multidrawer monstrosity called a card catalogue.

Woman using laptop

Small wonder this is probably the most exciting industry in the world right now. It's why Bill Gates is a household name, why Steve Jobs is a cultural icon and why the lives of a group of Harvard geeks became a hit movie called "The Social Network." Tech is constantly reinventing the world we live in, doing everything from turning our coffeepot on automatically to letting us call our overseas friends for free.

Tech so permeates our world that it can be difficult to categorize as a sector. It includes search engines such as Google, social media such as Facebook, software writers such as Microsoft and hardware manufacturers such as Hewlett-Packard. Online retailers such as eBay and Amazon generally are considered tech firms, as are broadband providers like Qualcomm. "It's a big definition," says Michael Masiello, a Rochester, N.Y., financial adviser and president of Masiello & Associates. "As a realistic person, you need technology in your portfolio. The question is, how much and what types?"

Why investors should care

We live in a digital world, and that has produced multidigit gains for untold numbers of investors. Tech stocks were also one of the better ways to weather the recent economic storms. Tech funds had the second-best performance of domestic stock funds tracked by Morningstar during the past three years. Only health funds did better. Admittedly, the competition wasn't much during the Great Recession; overall, tech funds are up just under 8 percent in the last three years. (In the last year, however, they gained 27.84 percent.)

But beware, this is not a game where everyone wins. For every Apple that blossoms there's a Flip that flops. Cisco recently said it's shuttering its once wildly popular digital camera line whose technology was overtaken by smartphones.

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Mergers and acquisitions are another reason for investors to care, since deals can often produce sharp price changes -- though not always for the better. Microsoft recently saw a window of opportunity and plunked down $8.5 billion for Skype, the Internet phone service. Earlier, AT&T rang in with a $39 billion bid to buy T-Mobile USA from Deutsche Telekom.

How you get into the market

Mutual funds are one of the easiest ways to invest in technology. There are 55 different technology sector mutual funds, according to Morningstar. Mutual fund organizations like Vanguard, Fidelity or T. Rowe Price typically have a tech fund. Or you can buy in via a broker such as Charles Schwab & Co. or TD Ameritrade.

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