It's been nearly four months since the major U.S. benchmarks set all-time highs before plunging into bear markets. And as of June 4, one of those gauges — the Nasdaq Composite index — is back to less than 2% below its February peak.
This index, about half of which is made up of technology stocks, has seen the quickest rebound from the recent turbulence in the stock market caused by the coronavirus pandemic. Even after a bear market, and with a likely economic recession already underway, traders have been keen to buy shares of these companies as they bet on the broader U.S. economic resurgence.
The technology industry led the bull market's charge in the 2010s, thanks largely to growth stocks like the so-called FAANG group (Facebook, Amazon, Apple, Netflix, and Google parent company Alphabet). And, in fact, Facebook, Amazon, and Netflix have all reached new all-time highs in recent weeks.
Predicting which stocks will fare better than others is difficult to do, which is why experts — and even famed investor Warren Buffett — recommend investing in index funds that track broad market benchmarks. Here's how a buy-and-hold investment in a fund tracking the Nasdaq would have worked out over the past 10 years.
The Nasdaq-100, which tracks the largest members of the broader Nasdaq index, rose to a record high on June 4, making it the first major U.S. benchmark to fully erase its losses from the coronavirus pandemic sell-off.
If you had invested $500 in an exchange-traded fund (ETF) that tracks the largest members of the Nasdaq, like the Invesco QQQ Trust, back in June 2010, that would be worth more than $2,800 as of June 3, 2020, according to calculations by Grow. That works out to a return of nearly 462%.
Rather than just calculating the change in price, which would be about 407% for the Nasdaq fund in that time period, we've calculated the total return. That assumes you reinvested the dividends — a portion of a company's or fund operator's profit — you earned each quarter, which is an easy way to grow the value of your portfolio.
The tech industry has benefited from the proliferation of so-called unicorns, privately held start-up companies valued at more than $1 billion, many of which transitioned from private to public in the last 10 years. Investing in the Nasdaq Composite, which is often cited as a proxy for tech stocks, would have been a relatively safe and effective way to benefit from the gains in this industry.
Tech stocks have been dominating the stock market for years now. Netflix was the top performer of the S&P 500 during the 2010s. The fact that so many of the largest and highest flying stocks are in the technology sector has helped to spur broader gains across the market. By comparison, a $500 investment in an ETF that tracks the S&P 500 would be worth $1,725 today, assuming dividends were also reinvested.
Many of the popular tech stocks have become synonymous with the definition of growth investing. With this strategy, investors knowingly pay a premium to buy the fastest growing stocks because they expect these companies will continue to outpace the broader market.
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The trade-off, however, is that a lot of tech companies don't pay dividends.
Among the five members of the FAANG group, only Apple currently pays a dividend. Investors have been rewarded because the prices of these growth stocks have surged higher, rather than through dividends; that explains why the price return and total return for the above ETF was so similar over the five-year period. It's still smart to reinvest dividends, when possible, because it's an easy way to grow your portfolio's balance.
And while investing in a fund that tracks a particular industry doesn't offer the broad market diversification that experts recommend, it's still safer than buying individual stocks. As a result, you don't have to worry about picking the winning stocks from the losers, because you'll get a mix of both. And keeping costs low is important because it won't cut into your returns over time.
It can be tempting to invest in those stocks that are leading the market, but it's important to understand the associated risks. Buying individual stocks can be risky, since those can experience sharp, unexpected fluctuations.
A safer and more reliable investment strategy is to buy index funds. And if you keep adding money to your portfolio regularly — a strategy known as dollar-cost averaging — you'll ensure you don't invest all of your money when prices are at a peak.
Rather than trying to make a quick buck on a risky investment, it's smart to focus on the long term. Experts recommend building a portfolio made up of a diversified mix of stocks that tracks the market, because it's generally a much safer bet than investing in individual stocks, and then sticking with your investments over time.
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