With Nasdaq in record territory, what it means for 401(k)s
Apr. 29, 2015
NEW YORK (AP) — Technology stocks are trading at levels not seen since Y2K and that may trigger some bad memories. After all, the last time the index reached a record high it quickly plummeted in what became known as at the dot-com crash.
But this time the Nasdaq composite index is very different from what it was in 2000, financial advisers say. The bull market that began after the recession may eventually lose steam, but advisers say there's no need for investors to panic or change up their 401(k)s or other retirement accounts.
The Nasdaq is just a number, says Stuart Ritter, a senior financial planner at T. Rowe Price in Baltimore. As long as investors have a diverse mix of U.S. and international stocks and bonds in their accounts, Ritter says, there is no need to worry.
The Nasdaq composite is not dependent on the technology sector like it was in 2000. "It's diversified," says Hugh Anderson, partner and managing Director at HighTower Advisors in Las Vegas.
Tech companies still make up a big part of the Nasdaq composite. About 40 percent of the more than 2,500 stocks in the index are tech stocks. That's considerably less than what it was in 2000, when about 65 percent of the index was made up of tech stocks. A more balanced index, which is also led by health care, cuts against another steep drop if the technology sector falls into a slump.
Fifteen years ago, many technology companies were unproven startups such as Pets.com or Kozmo.com, and they eventually flopped. Today's tech companies are a big part of everyday life, such as Google Inc., Apple Inc. and Amazon.com Inc., says Beth Lynch, an investment adviser at Schneider Downs Wealth Management in Pittsburgh. These companies are powering the search engines, and making smartphones we use to regularly buy goods online.
Some companies that were on the index in 2000 have grown since. Apple, for example, didn't release the first iPhone until 2007. Today, Apple is the world's largest company with a market capitalization of $760 billion. "Today you have more stable companies," says Jim Dunigan, chief investment officer at PNC Bank in Philadelphia. Apple and Microsoft Corp., for example, hold billions of dollars in cash.
And investors are backing actual results, rather than largely speculating about the potential growth of a startup. Corporate earnings, actual and projected, are what is driving stock prices higher, says Benjamin Beck, managing partner of Beck Bode Wealth Management in Boston. He says investors should focus on what companies expect to earn in the 12 months, not on their share prices or the level of an index.
"If you're focused on an all-time high," says Beck, "you're on the wrong road."
Still, if you're nervous, you can check how much of your retirement account is exposed to technology stocks. Three of the most widely held stock funds in 401(k)s are the Vanguard Institutional Index, the Fidelity Contrafund and the Fidelity Spartan 500 Index, according to 401(k) rating company BrightScope. Although technology represents the largest percentage of each fund's portfolio, its weighting is only slightly bigger than the next largest sector.
You can check how much exposure you have by looking through the funds in your retirement accounts and plugging the ticker symbols into the "Instant X-Ray" on Morningstar.com. The portfolio tool will give you a breakdown of what sectors and types of stocks a fund invests in.
In the short term, the Nasdaq is likely to fall slightly as investors sell stocks to cash in on recent gains. "It's part of the normal process," says Lynch from Schneider Downs Wealth Management.