Last Updated on December 29, 2021
Even an occasional market observer would know that the NASDAQ 100 index has zoomed past the S&P 500 after the March 2020 market crash. Has it begun to correct now? I received this question a couple of days ago. “I have been investing in Motilal Oswal NASDAQ 100 Fund of Fund via SIP since inception (against your advice!) and my SIP returns (XIRR) is about 45%. I am now scared that the NASDAQ 100 has moved up too much and will fall soon. Is it time for me to book some profits?”
The NASDAQ is significantly less diversified than the S &P 500 and therefore significantly more volatile. The big five stocks Facebook, Amazon, Apple, Microsoft, and Google (Alphabet) make up about 40% of the NASDAQ 100 and only 21% of the S & P 500. Data from slickcharts.
Risk-averse investors are better off with the S& P 500 for their “international diversification” needs than the NASDAQ 100. Risk aversion includes both huge upside and huge downside. Cannot have one without the other.
Most Indian investors who wanted to “diversify their portfolio with US stocks” (read saw huge returns and then jumped in) would only have 5% to 20% exposure to the NASDAQ 100 (whether they bothered to invest with a set allocation or not).
Therefore it would be best if they made investment decisions based on deviation from an intended allocation. For example, say if your preferred N100 allocation is say, 15% (of your entire portfolio). If you started investing in the Motilal Oswal NASDAQ 100 Fund of Fund from Dec 2018 and your current N100 weighty is 20% or more (that is 5% or higher than intended) then I would recommend that you rebalance the portfolio.
Not “book profits” (that is not possible as you cannot separate gain from the investment when you redeem), but “rebalance”. Sell 5% of your N100 FOF value and shift it to fixed income. Suppose you only started investing just a few months ago, the gain is not substantial and the weight has not increased by 5%, then do nothing. This simple weight-based “strategy” will reduce confusion and systematically reduces portfolio risk.
NASDAQ 100 Valuation
Considering its huge up/downswings in the past, N100 valuation can be tricky. For what it is worth, let us consider where the index is at presently. According to Bloomberg, the current P/E ratio of 36 is well above the 10-year average of 22. See a chart up to Jun 2017 for reference. That hardly means a fall is imminent for this index.
Using the tactical buy/sell tool, this is a plot of NASDAQ 100 Price in USD (dividends not included) and its six and twelve-month moving averages. The dotted line has a value of one when the six-month average is greater than the twelve-month average. These are monthly price charts
You can refer to more details and backtests using this idea here: (1) Is this a good time to buy gold? A tactical buying strategy for gold (2) This “buy high, sell low” market timing strategy surprisingly works! (3) Do not use SIPs for Small Cap Mutual Funds: Try this instead! (4) Can we get better returns by timing entry & exit from gilt mutual funds?
This is a close-up of the same graph on a normal scale with daily data (the above is monthly data). Notice how much the price has pulled away from the averages. It is still high in spite of the recent “reversal”. If we are to only follow the rules mentioned in the above references then it is not yet time to “sell” for those interested in tactical play. The simple asset allocation idea mentioned above is more than good enough for most investors.
The significance of how much the N100 has moved up can be seen from the percentage deviation of Nasdaq 100 USD price from six-month moving average with Nasdaq 100 USD price (right axis).
The deviation was the highest since the dot-com bubble and has since sharply corrected.
As the world is emerging from the lockdown and life gets back to normal, it would be best if investors tone down their expectations from US equity (both indices). Of course, the index could defy all logic and keep moving up or correct. No one can tell. This is why a focus on asset allocation with periodic rebalancing gets the job done.
Sign up for a new course on How to get people to pay for your skills! This discusses a simple framework for consistently growing your business with online visibility! Suitable for passive income seekers, small business owners and bloggers. Use this form to sign up for 60% early bird discount! You will be intimated upon launch.
🔥Enjoy massive year-end discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)