US stocks soared to new highs in August, and technology, once again, led the way. The tech-heavy Nasdaq 100 shot up 10.9% for the month. The Dow gained 7.8%, and the S&P 500 was up 7.0%, its second-best month of the year.
Stocks reversed course in the early part of September, however, with tech stocks dragging indexes down.
Tech stocks continue to influence the markets, up and down
Much of the August gains in US stock market indexes were driven by a handful of technology-focused stocks, and that’s particularly true for the Nasdaq 100, one of this year’s leading indexes.
The Nasdaq 100 index includes 100 of the largest non-financial companies listed on the Nasdaq Composite, and it is quite concentrated in technology companies. “Apple, Microsoft, Amazon, Alphabet, Facebook and Tesla now account for almost half the value of the [Nasdaq 100] index," CNBC reported.
Some of these tech stocks had incredible gains in August: Tesla was up an astounding 74% for the month, and Apple gained 21%. But most (75%) of stocks in the index gained less than the index average last month, and 25% of the stocks were negative.
“Increasing dependence on a small number of big stocks for overall performance can be a sign of vulnerability,” Schwab noted on August 31, 2020, and just a few days later, on Thursday, September 3, tech stocks gave back gains, and the Nasdaq 100 lost -5%. It's too soon to know whether this is a routine pullback or the start of a bigger shift in the markets.
Investing in concentrated markets
Covid-related market volatility triggered many investors to accumulate record amounts of cash earlier this year. Assets in money-market funds soared to a record $4.8 trillion in late May. A lot of this cash had been coming off the sidelines in August, pushing stocks to surge as interest rates remain at near-zero levels.
If you’re still looking to get back in the market now, make sure you are doing so in a way that’s consistent with your goals and risk tolerance. Here are four things to keep in mind:
1. Have a plan
Get a plan together so you’ll know in advance when you’ll invest, how much you’ll invest at a time, what funds you’ll buy, and how often you’ll buy them, and then stick to your plan. This is what FundX investment advisors are doing for our wealth management clients.
2. Stay diversified
Given the strong gains from tech stocks, it can be tempting to shift from investing in mutual funds to owning individual stocks. And if you’ve been out of the market and missed out on recent gains, tech companies may seem like a way to make up for lost time. But making a concentrated bet on a few names could put your financial future at risk.
“If you choose to own only a fraction of the more than 3,500 publicly traded stocks in the U.S., what are your odds of picking exactly the right ones? They are very small, probably similar to picking a winning lottery ticket,” the Wall Street Journal explained recently.
3. Invest in funds and ETFs
Most investors are better off investing in diversified mutual funds and ETFs. Many of this year’s top-performing stock funds give you access to leading tech stocks with greater diversification. With a more diversified fund portfolio, you may be more likely to stay invested if markets tumble, and that could really improve your long-term results.
4. Look for buying opportunities
If you were concerned about buying into a rising market, September may present a buying opportunity. “Following a big August, with gains more than 5%, Barron’s found that the Dow drops almost 80% of the time in September. The numbers for the S&P and Nasdaq are about 60% and 55%,” Barron’s reported.
September tends to be a historically weaker month for stocks, and the months before an election can be volatile.
What to do you if you need help
If you feel stuck or you find that even when you know what to do, you have trouble following through, then consider working with an advisor who can help you get back on track. Click here and let’s set up a time to talk about what you’re trying to achieve and see if we’re a good fit.