Tech is where it is at at the moment. We are constantly hearing news of massive profits and growing share prices. We all want a piece of the action, a chance to make an easy buck. While we can get distracted by the upside, it is easy for investors to forget about the downside of investments…and the scale of them.
Investing in a NASDAQ ETF is the easiest way of getting access to the US tech companies. The NASDAQ exchange lists about 2,500 companies but as we saw before, that doesn’t mean the ETF has all of those companies. Most have 100 companies in their index.
That means that investing in a NASDAQ ETF gives you exposure to 100 companies, all in the USA and all in the technology industry. If (when) there is a downturn in the tech industry, there is no protection for your money. The downturn doesn’t mean a bubble will burst, it may be a correction as the market thinks tech stocks are overpriced. We don’t know (like we never thought a pandemic would cause a recession).
The S&P 500 is the trusted index of the American investor. Again, tech has a big influence in it with the big 5 of Apple, Microsoft, Google, Facebook and Amazon making up 20% of the index. But it also has pharmaceuticals, finance, consumer goods, retail, airlines, communications. You get the idea. If one industry has a downturn, other industries may still be doing well. After all, we still need to buy toothpaste and take medicine.
The MSCI World Index is made up of 1,600 companies all around the world. And not just the biggest companies, 30% of the index are made up of small and medium sized companies too. Like the S&P 500, you have the diversification of investing in a range of different industries but you are also investing in different regions of the world too.
What all this means, is by taking a risk of investing in a higher concentrated fund in one industry, we get more upside when things are good. By having our money invested in more companies and more regions, the returns that we get are lower but so is the investment risk.
The chart above is a measure of volatility against returns over the last 15 years. We can see that the returns (Y axis) of the NASDAQ are well above the other two but so is the volatility exposure (X axis). It simply means you are taking more investment risk and getting a higher return.
The key is to remember this when you are investing and don’t get distracted by the high past performance figures, which you have to remember, have already been made and you won’t get any of.
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