Best times to invest in technology stocks – a long term perspective
To put the current tech stock correction in perspective, I thought it would be interesting to look at historical returns for technology stocks.
I looked at some of the best five-year periods to own tech stocks during each decade over the last 50 years. I’m using the Nasdaq Composite index because it’s been published since 1971 and has always had a bias toward technology and growth stocks. The Nasdaq 100 index would be a slightly better proxy for tech stocks, but its history is shorter.
Image credit: Tradingview
The green arrows on the chart indicate the start of the best five-year period during each decade, and the amount the index rose over the following 5 years. I’ve included two five-year periods during the 1990s and 2000s because they were a few years apart and formed distinct cycles.
Note that this is a chart of monthly closing prices so some of the intra-month price extremes aren’t shown. This is why the current correction barely registers on the chart.
With the benefit of hindsight, these were the best dates to invest in the market with a five-year view. The first observation is that out of the seven dates, four marked the low point after the market declined 25% or more. The remaining three periods began after fairly minor corrections.
Another observation worth making is that severe corrections or crashes don’t always result in the biggest rallies. The best five-year period in the last 50 years followed a fairly minor correction in 1995.
An investor waiting for a deeper correction in 1995 might have missed out on a 500% rally. On the other hand, the 77% Dotcom crash from 2000 to 2002 was followed by a five-year return of 134% - the least impressive of the seven rallies. Even selling the high in 2007 would have resulted in a return of just 149%.
It’s also interesting to see that October 1990 was a slightly better time to buy than the crash of 1987. The immediate conclusion one might draw from this chart is that the best time to buy technology stocks is after a severe correction. That is true, but in reality, you can never time the bottom. The biggest risk for investors is waiting for lower prices and then missing out on the rally that follows.
𝐑𝐞𝐭𝐮𝐫𝐧𝐬 𝐚𝐫𝐞 𝐜𝐨𝐫𝐫𝐞𝐥𝐚𝐭𝐞𝐝
This exercise is based on the Nasdaq Composite as a proxy for technology stocks. Obviously, the objective of a portfolio is to generate returns that are better than the market or an index like the Nasdaq. However, stock returns are highly correlated and while some stocks outperform others, the performance tends to occur at the same time.
There are stocks that outperform during bear markets, but they typically underperform over the long term. It’s tempting to try to switch back and forth between growth and defensive stocks but doing so means you have to get the timing right when you switch to defensive stocks (or cash for that matter), and again when you switch back to growth stocks. If the timing of either of those trades is wrong, long-term performance will suffer.
The biggest takeaway from this chart is that investors do best by sitting tight during corrections. When it comes to adding new funds, corrections offer an opportunity, but waiting for a bigger crash can also result in a missed opportunity.