Will the tech stock bubble burst in 2022?

Alice Guy explains why the tech stock bubble may burst in 2022, why tech stock growth is unpredictable and how to minimise your investment risk.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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The tech stock bubble has been big news in the last few years. Apple, Microsoft, Amazon and Tesla have seen huge increases in their share prices over the last 10 years, and six big tech stocks now dominate the US Nasdaq 100 index.

Here, I take a look at what the future might hold for tech stocks in 2022. Are there signs that the tech stock bubble is about to burst?

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Tech stock growth

The growth of tech stocks has hit the headlines in recent years. In the period from 2012 to 2021, the value of Tesla skyrocketed, with share price growth of an incredible 13,198%. The share price of other tech stocks has also grown at amazing rates. The value of shares in Amazon, Microsoft, Facebook and Netflix has increased by over 1,000% in the past 10 years.

£1,000 invested in Tesla shares in 2012 would be worth an amazing £131,980 today, making Tesla the top growth share of the last 10 years.

Big price volatility

But don’t get your cheque book out just yet! As well as offering incredible growth opportunities, investing in tech stocks also holds big risks. Just like other shares, tech stock growth doesn’t necessarily predict future success. Tech stocks tend to suffer from a huge amount of share price volatility.

It’s notoriously hard to predict which tech companies will be successful in the future. I’m old enough to remember another tech bubble during the 1990s where many internet companies saw huge share prices increases. That tech stock bubble burst in 2002 when investors lost confidence in tech stocks. Investors realised that many companies wouldn’t turn out to be a success and so confidence in the whole sector collapsed.

Even Amazon saw its share price drop by 90% in 2002, and it took years to recover. Other tech companies, like Worldcom, NorthPoint Communications, and Global Crossing, failed and shut down completely.

Signs of a slow down

There are some signs that investors are starting to get the jitters over tech stocks, suggesting the tech stock bubble might be about to burst. The Nasdaq 100, which is heavily weighted towards tech stocks, hasn’t grown in the last month.

There are also signs that professional investors may be dumping their tech stocks as many big tech stocks are showing falls in value. Netflix stock is down 12.8% in the past month, and Microsoft stock is down 5.3% over the same period.

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Hard to pick tech stocks

The success and subsequent failure of exercise company Peloton demonstrates the risk of the tech stock bubble for investors. Peloton entered the Nasdaq 100 index in late 2020, and its share price soared to a high of $171 in early 2021. But the growth was short lived. Now, the share price has plummeted to $30 and the company has dropped out of the Nasdaq 100.

The company suffered from supply chain problems during 2021 and struggled to keep up with customer demand. The drop in share price doesn’t necessarily mean the company will be a failure in the future, but it does mean that investors aren’t sure. 

How can you minimise risk when investing in tech stocks?

Holding individual stocks is always a risky strategy for investors, particularly when it comes to tech stocks. It’s extremely hard to predict which companies will be successful in the future. Being part of the tech stock bubble doesn’t always predict future success.

If you are keen to invest in tech stocks but want to minimise your risk, then here are some ideas:

  • Invest in a tech stock fund rather than individual shares through your pension or a stocks and shares ISA.
  • Diversify your portfolio across many different types of shares and asset classes.
  • Only invest a small part of your portfolio in risky tech stocks.
  • Don’t invest money you can’t afford to lose.

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