wealth calculator

Here’s how much money you’d have if you invested $1,000 in tech stocks in 2000


Looking at historical returns is sometimes considered a no-no in the investing world. As you’ve likely read in a thousand disclaimers, past performance isn’t indicative of future results.

You also run into the problem of what time period to look at. Depending on how you slice up the timeline, results can look very different.

Take the numbers from a recent tweet from Ben Carlson, author of “A Wealth of Common Sense,” which examines the relative performance of stocks in the much ballyhooed tech sector against energy — a sector that has been repeatedly left for dead by market prognosticators.

From 2000 through 2007, an index ETF tracking energy stocks in the S&P 500 returned 230% compared with a 47% loss among the commensurate tech stock fund, according to data from YCharts. From 2008 through 2020, tech returned a whopping 499%, and energy surrendered 31%.

Since the start of 2021, energy has pulled back into the lead, returning 97% compared with a 17% among tech firms.

All told, had you invested $1,000 into large-company tech stocks at the beginning of the century, you’d have about $3,720 as of March 3 if you never touched the money, per YCharts. Rather shockingly for people who have observed the meteoric rise of tech as a sector, the same investment in energy firms would have net you roughly $4,450.

These results aren’t predictive of anything. But dig into the numbers and the context behind them, and you can unearth some important lessons about investing and building wealth.

Markets are cyclical, so spread your bets

Different segments of the market perform differently under different conditions. That you can pick out chunks of this century when tech stocks and energy stocks have behaved drastically differently is just one small example. Zoom out, and you can see that it happens across all investable markets.

Take a look at investing firm Callan’s Periodic Table, which tracks different kinds of stock and bond investments, and you’ll see that no single asset class consistently offers the highest return for investors. If you began investing in 2020, for instance, real estate was a bad choice — an index of real estate stocks sank 9.4%. In 2021, it was among your best options, returning north of 26%.

Holding a diversified mix of assets provides a less bumpy ride for investors and gives you the best chance of avoiding having one particular kind of investment drag down your portfolio’s performance, experts say.

“Building a portfolio where nothing moves in the exact same direction will give you a blended return,” Lauren Hunt, a certified financial planner and senior advisor at Moneta Group, told Grow. “Research has shown that those portfolios will get you a higher risk-adjusted return over time.”

Drawdowns hurt overall performance

Having a major drawdown early on in the sample period give tech a huge disadvantage against energy that even some stellar periods of performance fail to make up. It’s something experts say bears keeping in mind when managing your own portfolio.

“We know, by the math, if you experience a 30% decline, it’s going to take a 42% return to make that up,” Bob Bacarella, founder of investment firm Monetta Financial Services, told Grow. “That’s a lot of ground to make up. It’s always advisable to try to avoid volatility and significant declines in your investments.”

Over the course of full market cycles, losing less when markets slide can be as powerful to your overall performance as outrunning the market when things are headed up. If you hold mutual funds in your portfolio, examine their historical volatility. Measures such as beta, standard deviation, and downside capture can help you determine if a fund you own is likelier to provide a smoother ride through choppy markets.

Buying dips, dollar-cost averaging can help you build wealth

Video by Helen Zhao

Instead of trying to figure out when investments will go up and down, financial experts recommend investing a set amount of money at regular intervals, a practice known as dollar-cost averaging. Over time, the strategy guarantees that you “buy low and sell high” as you buy more shares when shares are cheap and fewer when they’re expensive.

To return to the tech and energy example, if you were making a single $1,000  investment at the beginning of the century, you would have been better off in the energy ETF. But tech’s several drawdowns meant that consistent investors theoretically got to buy lots of shares when they were very cheap.

So what if you invested $100 every month after your initial $1,000 outlay? If you chose energy, you’d have had just shy of $60,000 today, per DQYDJ’s calculator. The same investment in tech would be worth about $164,000.

There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.

More from Grow:



Source link