Tech Stocks vs Tech Funds

David Codelli: “I have been a long-term, enthusiastic investor in T. Rowe Price Science and Technology fund. Since your mutual fund calculator pretty much deflated that enthusiasm for me, I have been looking into alternatives. I have stumbled on a new theory. Since, (1) most technology funds buy the big players (Cisco, Sun, AOL …) anyway; and (2) those companies often buy small high tech startups on their own (i.e. to some extent they are mutual funds themselves); and (3) with stocks, I have less expenses and taxes to worry about than with funds . . . don’t you think for some investors (long term focus, only about 15% invested in technology), it makes sense to replace the managed fund with three or so such companies? I’m thinking Sun, IBM, Cisco. I got this idea by graphing the performance of these stocks against the performance of the funds.”

Yes. (And I would throw Microsoft into that mix if I were you, too.) I am no expert on tech stocks, but I certainly don’t think 15% is too high a weighting. And by setting up your own “Personal Fund” for these stocks, as we call it, you will, as you note, have a big advantage over the mutual funds dragged down by expenses — as well as the advantage of controlling your own tax consequences.

What you do miss with this strategy is the potential for huge gains if you catch just the right small tech stock. But that’s true with a fund, also, because although the fund may well own it, its impact will be diluted by all the other stocks the fund owns.

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