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For tech investors this month, the smartest buy of all might have been some Dramamine.
That’s because the technology sector, which has seemed so bulletproof for most of 2020, has been whipsawing around pretty violently. The tech-heavy Nasdaq composite, for example, plummeted almost 10% in a week, before recovering some of those losses in recent days.
For investors who had gotten used to tech’s steady climb, in this year of Covid-19 when much of society has been working and shopping from home, it was a wake-up call. For longer-term investors, it even triggered a little PTSD from a past market event: The dot-com bubble.
“The narrative might be out there that this looks like other volatile tech environments, like the late 1990s and early 2000s,” says Michael Liersch, head of advice and growth strategies in Wells Fargo’s private wealth management division. “But this time period isn’t rhyming with that period."
Back then, as investors tried to wrap their heads around a new technological age, many high-flying startups had big dreams, bigger debt, and zero earnings. This time, many tech names are proven cash machines, with fortress-like balance sheets. Those sturdier fundamentals, combined with pandemic-era societal trends tilting in technology's favor, suggest that a similarly dramatic price collapse is unlikely.
Investor queasiness is certainly understandable. Consider electric carmaker Tesla: During tech’s recent swoon, Elon Musk’s company swung from around $500 a share (post-split), down to below $300, and back up to $450, all within days. Even for savvy market veterans, that’s a lot of volatility to stomach.
Thankfully the early September free-fall didn’t continue, with Big Tech ticking back up in recent days. But in many ways, this respite gives investors the perfect window: A moment to reassess, think about allocation and valuations, and ponder what this pullback really means.
To handle this volatility without losing your lunch, there are a few strategies you can put into play.
Reframe your returns
When you are considering asset returns, it all depends on what time frame you are looking at. In the last couple of weeks, for instance, tech share prices might indeed look ugly.
But if you “reframe” them, says Liersch, the numbers might tell a different story. Pull back from the last few weeks, and look at the sector with a wide-angle lens: Year-to-date, the Nasdaq 100-tracking fund QQQ has returned over 30%, even including September’s dip – hardly reason for panic.
Reevaluate your risk tolerance
September’s little cliff-jump in tech prices could be a useful moment to reassess risk. Your theoretical appetite for risk is one thing, but actually going through a plunge in asset prices is quite another. If it’s too much to take, that puts you in the danger zone of panicking and selling everything, which is the real long-term portfolio-killer.
So if you discovered that your risk tolerance wasn’t as high as you thought, you could do worse than to trim back some tech holdings, take some profits off the table, and keep the proceeds either for short-term needs if you are nearing or in retirement, or redirect them into other, relatively undervalued asset classes.
“If the recent volatility has you reaching for Tums, you're doing it wrong,” says Brian Fischer, a financial advisor in Miami with Evensky & Katz. “It’s time to rethink your investment. You may want to reduce the size. Investing when your mind isn’t right leads to poor decision-making.”
If tech’s volatility and high valuations have you nervous, you may just need a minor course correction. Your target allocation might off because of the sector’s growth, so now is a good juncture to bring it back on track.
In a normal year, investors might check in on their allocations every year, says Liersch. But in this strange era, with some parts of the market in crisis and others going gangbusters, it couldn’t hurt to take a look quarterly or even monthly.
Distinguish past from present
Any tech plunge naturally brings to mind the dot-com bubble, which exploded in 2000 and took much of the market down with it. But drawing the exact same lessons from our current market could be a mistake.
“We think that some of these companies are so transformative, with such extreme growth, that it justifies the multiples,” says Freddy Garcia, an adviser with Left Brain Wealth Management in Naperville, Ill. “My advice would be to drill down to the fundamentals on a case-by-case basis. If there have been no changes in a company’s fundamentals other than a recent price swing, then investors should consider staying the course.”
Counteract your own bias
Sudden market movements make investors highly vulnerable to “action bias,” says Liersch. That’s the drive you feel to do something, anything, because of the latest segment you saw on CNBC.
Action gives us a temporary sense of control, but it leads to the “churning” of frequent trading, Liersch warns. That frenetic movement, and all the trading fees that come with it, will eat away at long-term returns.
It also feeds our human tendency to buy high and sell low – which is, of course, the exact opposite of what you want to be doing. “When stocks swing down, people tend to want to sell, and when they go way up, they want to buy,” says Liersch. “That’s just not a winning approach for your financial life.”