Tahoe-Truckee Market Beat: NASDAQ finally goes back above 5,000
March 11, 2015
After 15 years, the NASDAQ is finally back above the 5,000 mark.
On March 2, the NASDAQ closed at 5,008, its first close above 5,000 since March 10, 2000, when it set its all-time record closing high of 5,048.
It's not possible to invest directly in an index, but if you had bought the NASDAQ on March 10 of 2000 after holding for 15 long years, you'd almost be back to even. There are some good lessons to be learned from this.
One is about the effects of inflation. In the example above, I mentioned that if you had purchased the NASDAQ in March of 2000 and held it until today, you'd almost be even, but that is in nominal terms, not real terms.
To get even in real terms, you must factor in inflation. The NASDAQ would have to be at about 6,900 today for your money to have kept pace with inflation.
Another lesson is to pay attention to valuations. When stocks are extremely expensive, use caution. The value of a stock is determined by using measurements like the price to earnings ratio, price to book ratio, price to free cash flow and others.
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Some of the most successful investors or our time, like Warren Buffet have been value investors, meaning they try to purchase stocks when they are trading at reasonable valuations.
Money in the stock market should also be long-term money, not funds that you need in the short term.
Historically, holding index funds for the long haul has produced good results, and you should be prepared for market downturns.
Had you invested in the S&P 500 index on Oct. 1, 2007, by Feb. 2 of 2009 you would have been down by over 50 percent.
Had you held on until today, you would have a gain of about 36 percent over the seven-plus-year period, which isn't too bad, but you would have had to hold on during a 50 percent downturn to get here.
It is nice to see the NASDAQ back at the 5,000 level, and it is important to remember the lessons learned from the bursting of the Dot Com bubble back in year 2000.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.