Nasdaq: The Most Cautionary Years in History to Buy
If the S&P 500’s history teaches us not to ignore valuations when buying, the Nasdaq’s history reminds us that:
The tech industry may have strong long-term prospects, but that doesn’t mean tech stocks are worth buying at any price.
2000: You could have been underwater for nearly 15 years
This is one of the Nasdaq’s most classic examples of investors being stuck with losses for the long term.
If you had invested $1 million at the Nasdaq’s peak in 2000, your account might have been worth only about $220,000 when the market hit bottom.
Even as the index gradually recovered, you would still have had to wait nearly 15 years for its price to return to its previous peak.
If investors panic-sell during a downturn, their losses become real.
It’s worth noting that this discussion concerns the Nasdaq Composite, not the Nasdaq 100. Their constituents and historical performance are not exactly the same.
Long-term return data for the Nasdaq Composite show that, even with dividends reinvested, it took about 14 years to recover from its 2000 peak; based on the price index alone, recovery took nearly 15 years.
What does this mean?
Suppose you bought an index fund in 2000:
* Year 1: Your losses could be severe.
* Year 3: The market is still far below its previous peak.
* Year 5: Even after a rebound, you may still not have broken even.
* Year 10: The market may still not have recovered to its previous price peak.
* It wasn’t until around 2015 that the index price finally surpassed its previous peak.
Of course, this assumes you invested a lump sum at the historical peak and made no further contributions.
If you kept investing new money during the downturn, the outcome could be very different.
2021: Tech stocks undergo another major correction
From late 2021 through 2022, tech stock valuations were hit by factors including rising interest rates.
The Nasdaq Composite fell significantly before gradually recovering.
The recovery from this correction took far less time than the long wait after the dot-com bubble burst in 2000.
This also shows that:
A 20% or 30% stock market decline doesn’t necessarily mean waiting more than a decade; recovery time is determined by the depth of the market decline, valuation levels, earnings growth, and the subsequent economic environment.
Historical data on the Nasdaq’s long-term drawdowns also show that the bursting of the dot-com bubble in 2000 was one of the most severe drawdowns in its history and one of the longest to recover from.
So, don’t say the US stock market is easy—its challenges are just as tough.