Stay in Stocks and Keep Your Sanity

Tech stock volatility has received a lot of press coverage in 2021. The tech-heavy Nasdaq index hit new all-time highs four times this year. Every time it hits a new high, the news covers it with bells and whistles. Every time it falls off that high and comes a tiny bit back down towards earth, you hear sirens and alarms.

After reaching new all-time highs in February, market-watchers lamented the March tech dip. Then tech bounced back and hit new all-time highs again in April. Now tech stocks are in the doghouse again for falling off those April highs.

All of this comes after a record-shattering run for tech stocks that started last April and continued through February.

So, let's zoom out and look at the broader trends. If you look at a chart, there are four basic takeaways:

1) Between early 2017 and early 2020, the Nasdaq basically doubled.

2) The Covid crash caused it to fall by roughly a quarter in March 2020.

3) From April 2020 through May 2021, it basically doubled again.

4) Over the last five years, the Nasdaq has roughly tripled in value despite one of the worst financial crashes in history.

So what does all this mean for your portfolio? Where do tech stocks go from here? Are they overvalued?

Analysts point to different reasons that could explain why the tech sector is cooling off, if the current dip turns out to be a true cooling off period and not just typical volatility.

Some of the reasons are very straightforward. The pandemic is slowly unwinding and many people around the world are doing more of the things they did in the old days. That could mean that companies that profited from quarantining, social distancing, and tele-commuting could see lower profits as people resume their old habits of commuting to work, taking vacations, and going to ball games.

Some of the reasons are very complex. Changes to banking rules regarding the tier 1 capital ratio that were made in March 2020 were allowed to expire at the end of March 2021, forcing many banks to sell certain bonds by the end of the quarter. This had clear ramifications for both the stock and bond markets, as prices for both bonds and growth stocks fell. Establishing clear cause-and-effect relationships is interesting in hindsight, but very difficult in real time for investors contemplating major moves based on short-term developments.

Longtime readers know my opinion that, unless you are a professional day-trader, you should not try to time the market.

When prices fall, it's natural to ask the question, "Will my tech stocks be worth less next month than they are today?" If you think the answer is yes, you may be tempted to sell.

But a more helpful perspective is to ask yourself, "Have the tech companies I'm holding successfully innovated and earned profits over the last five years? Are they well-positioned to continue doing so between now and when I'm planning on retiring?"

If you think the answer to these questions is yes, then you shouldn't worry too much about the stocks' price next month. You should just remember to keep an eye on corporate earnings as you monitor your investments over the long-term.