The funds that toppled over

Hi-tech's tumble shows the need to balance risky investments with safe ones
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The wild gyrations in technology stocks in recent days has been enough to send even the most committed investor running for cover. America's Nasdaq index, which includes top technology companies such as Microsoft, had the most volatile day in its history last Monday, plunging over 500 points before recovering most of the lost ground.

The UK's tech-MARK index of technology stocks followed suit, crashing 8.6 per cent to a three-year low.

There was a further slump in shares, and technology funds that have produced staggering returns over the past year have also gone into reverse in recent weeks. Thousands of investors rushed to buy technology individual savings accounts (ISAs) ahead of the 5 April deadline, and many have already been stung by the market downturn.

The good news is that, in the long term, it makes sense to have some exposure to the technology sector - but it should be limited. While technology - in particular the internet - is having a radical impact on our lives, many over-valued companies are trading at unsustainable prices.

"We are very positive in the long term as far as the technology sector is concerned," says Richard Wilson, marketing director at Aberdeen Asset Management, which runs the successful Aberdeen technology fund. "We are not concerned about recent volatility. But it is necessary [for investors] to have a balanced portfolio: no more than 10 or 15 per cent of their holdings should be in tech stocks."

It might be hard trying to get this message across when the Aberdeen technology fund has risen 158 per cent in the 12 months ending February, but recent volatility in the sector underlines the need to have a good balance of investments.

Not only should investors be guarding against a downturn in the technology sector, but anything could happen even in "safer" markets such as the UK, never mind Japan or the emerging markets.

"Diversification is the key to investing," says Patrick Connolly, associate director at independent financial adviser Chartwell. "We try to make sure our clients are not overweight in one particular area. Without a doubt there is no point in putting all your eggs into one basket."

Paul Tompkins, a Hertfordshire-based farmer, has a "middle of the road" risk profile. His portfolio, which is managed by Chartwell's director Martyn Laverick, includes a broad range of unit trusts, with-profit bonds and tax-exempt savings certificates (Tessas). He is relieved that he has no technology stocks, while he has still seen a 10 per cent return on his portfolio over the past year.

"All I want is safe investments rather than risky technology stocks," he says. "I'm not much of a risk taker and I don't like sleepless nights."

An "investment portfolio" sounds as if it should be the preserve of well-informed professional investors with thousands of pounds stashed in a broad range of stocks and shares. But a balanced selection is just as important for the "ordinary" investor. A "portfolio" can be used to describe any collection of shares or investments, however small.

Although a portfolio is a collective term for a group of separate investments, it should be considered as a whole. When you make any investment decision, it is important to take account of those savings or shares that you already own.

Once you have established your investment objectives, such as whether you are investing for growth or income, you should look at areas in which your existing portfolio is weak and adjust it accordingly.

Investors who do not assess their portfolio regularly may be unaware of their exposure to a certain region or sector. This is an easy trap to fall into; many investors buying pure technology funds, for example, already have some tech exposure via existing holdings because few funds are completely tech-free.

The nature of your portfolio will depend on your attitude to risk. There is little to be gained from looking at performance tables, picking an investment because it comes top of its sector, if it doesn't fit in with your risk profile. If you are the type of person who lies awake at night worrying about money, investing all your assets in the tech sector is not a wise move.

A balanced portfolio should start with "safe" investments, such as gilts or a mini cash ISA, before you take on more risk. A portfolio only works if it suits you and you are happy with it; one person's attitude to risk is very different from another's.

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