Many investors steer clear of biotechnology companies because they don’t understand the biotech industry. Biotech is often perceived as a high-risk area of the market, appropriate only for those with biology and genetics backgrounds — or for pure speculators.
There’s certainly some truth to this perception. The average investor isn’t likely to understand gene sequencing, or the intricacies of new drug-delivery technologies.
But I still think the perceived risk of biotech stocks is overstated and that investors understand the industry better than they think.
Like with many industries, a basic knowledge is all that’s needed to get started. I doubt many investors can name more than a half-dozen internal parts of an Apple iPhone (NYSE:AAPL), what percentage of Amazon’s (NASDAQ:AMZN) revenue comes from cloud services or what percentage of oil Chevron (NYSE:CVX) produced from U.S. wells in 2013.
But investors don’t steer clear of these stocks. At a high level, they understand why all three are good investments over the long haul. The same high-level understanding can form the foundation of a successful biotechnology allocation within your portfolio.
Don’t Fear Investing in the Biotech Industry
For example, I’d wager a large sum that you are close to somebody with a form of cancer.
Ovarian cancer is one of the most lethal forms of cancer facing women today. And lung cancer is the most lethal form of cancer out there. It was responsible for over 160,000 deaths in the U.S. in 2012, more than breast, pancreas and prostate cancer combined. Globally, lung cancer kills more than 1.3 million annually.
These are sobering statistics for just two diseases. And there are thousands of other diseases and health conditions on which biotechnology companies are focused. You don’t need to be a biotech industry expert to see the immensity of the market opportunity for treatments.
More treatments are coming out every year. Many have potential to significantly increase life expectancy among patients with lethal diseases. And others will help people live normal lives with less lethal, but still disruptive, conditions. I think it’s wise to have some exposure to the industry.
A good place to start is with a top-rated biotech mutual fund. I like the Fidelity Advisor Biotechnology Fund (FBTAX). My wife and I have been contributing to this fund for almost a decade in our retirement account. It carries five stars from Morningstar, and has been an exceptionally strong performer over the past two years.
I’m not saying now is the time to go “all in” on FBTAX (or any other biotech fund). It’s up by 54% in 2013 alone. Rather, I recommend a dollar-cost-averaging strategy for this investment since the idea is to build long-term exposure, and not to time some specific event.
For those who want to get into specific stocks, the FBTAX is a good jumping off point. The top ten holdings — including Gilead Sciences (NASDAQ:GILD), Amgen (NASDAQ:AMGN) and Celgene (NASDAQ:CELG) – are all great companies.
Don’t be turned off by the perceived complexity of the biotechnology industry. The common argument against investing in biotech … “I don’t invest in what I don’t understand” … isn’t a good one in my opinion.
Like anything new, start at a high level and dig deeper as your understanding grows. I expect that if you check out the drug treatments offered by FBTAX’s top three holdings, you’ll find you know a lot more about this industry than you thought.