£5,000 invested in the Nasdaq 100 index at the start of 2023 is now worth…

The Nasdaq 100 index has been on fire over the past couple of years. But this has left it pricey, meaning a degree of caution is warranted.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After sprinting 95% higher since the start of 2023, the Nasdaq 100 should be called the Usain Bolt of indexes. In December, it hit 22,000 for the first time, a level it currently remains near (21,326).

This means an investor who put five grand into a fund that tracks the index at the start of 2023 would now have nearly £10,000. That’s an incredible result — it’s not often an index almost doubles in just two years!

Why’s this happened?

The Nasdaq 100’s made up of the largest non-financial firms on the tech-focused Nasdaq exchange. So when tech stocks sold off heavily during the 2022 bear market, the index crashed 33%.

Therefore, this hypothetical person would have timed their early 2023 investment perfectly. That’s when investors were anticipating lower interest rates due to easing inflation. Consequently, the US stock market was just starting to recover.

Also in late November 2022, generative artificial intelligence (AI) bot ChatGPT was launched. This sent shockwaves through the tech world, provoking deep-pocketed companies to make massive capital investments for fear of being left behind by this revolutionary technology.

AI-related stocks, especially chipmaker Nvidia, have since driven the Nasdaq 100 to the moon.

How to invest?

To get involved, investors could consider buying something like the Invesco EQQQ Nasdaq 100 ETF (LSE:EQQQ). The share price is up around 145% in five years!

This exchange-traded fund (ETF) holds non-tech names like Costco and Starbucks. However, 51% of it is in the information technology sector. And nearly a third’s now in just four mega-cap stocks: Apple, Nvidia, Microsoft, and Amazon.

While these are all fabulous companies, this high level of concentration presents risk. If a couple of them suddenly encounter problems, or there’s a tech sector meltdown, the Nasdaq 100 would underperform, at least for a while. Remember the 33% slump in 2022..?

And with the growth-oriented index yielding a meagre 0.4%, there wouldn’t be much income to help soothe the pain.

The index’s high valuation is certainly worth noting too. It currently has a price-to-earnings (P/E) ratio of 32, which makes this raging bull market one of the most expensive in decades.

This probably explains why billionaire investor Warren Buffett spent last year selling down some of his top holdings, including Apple. In total, he unloaded $133bn worth of shares in the first nine months of 2024!

A simple strategy to consider

Due to the high starting valuation today, I don’t expect the Nasdaq 100 to perform anywhere near as strongly over the next five years. But I think it will still do well, given the ongoing technological revolution and the high growth potential of its innovative constituents.

I hold a few Nasdaq stocks in my portfolio, so I’m not looking to get more exposure via an ETF. But for those looking to invest, I’d say it might be better to consider using a pound-cost averaging strategy.

This would involve investing at regular intervals, such as monthly or quarterly, regardless of market conditions. It would smooth out the purchase prices, thereby helping to minimise the risk of making a single large investment at a market peak. Nobody wants to do that!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Apple, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Black man sat in front of laptop while wearing headphones
Investing Articles

If a 40-year-old put £500 a month in FTSE 250 shares, here’s what they could have by retirement

The FTSE 250 has delivered Footsie-beating returns over the last 20 years. Can it keep going? Royston Wild takes a…

Read more »

Investing Articles

1 key stock market indicator to watch this week

The US Index of Consumer Sentiment is a key leading stock market indicator. And UK investors might want to pay…

Read more »

Edinburgh Cityscape with fireworks over The Castle and Balmoral Clock Tower
Investing Articles

I’m on the hunt for cheap shares to buy this January! Here’s one I found

Christopher Ruane has been looking at the UK stock market to try and find shares to buy for his portfolio.…

Read more »

Investing Articles

4 SIPP mistakes I’m avoiding like the plague!

Christopher Ruane explains four errors he is trying hard to avoid in investing his SIPP, as he tries to maximise…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Up 28% in a month, I’ve been loading up on this penny share  

Our writer has been buying more of a penny share he already holds and reckons recent news could point to…

Read more »

Investing Articles

How to aim for a reliable 6% dividend yield when picking stocks

Mark Hartley outlines his strategy to identify top-quality stocks with high dividend yields and strong fundamentals for consistent income.

Read more »

Investing Articles

Investing £20,000 in this FTSE 250 stock today could net investors £1,944 in passive income this year

After falling 11% in a week, this FTSE 250 company is set to return almost 10% of the its market…

Read more »

Investing Articles

I asked ChatGPT to name the best S&P 500 growth stock and it picked this AI powerhouse

Muhammad Cheema asked ChatGPT to pick its top S&P 500 growth stock. He was disappointed with its response, which missed…

Read more »