This has been yet another great year for the stock market. The S&P 500 index (SNPINDEX: ^GSPC) recently reached an all-time high in August, and is up about 12% year to date. But some investors are worried. They’re wondering if the artificial intelligence (AI) trade is overhyped and overpriced. They’re concerned that U.S. growth stocks are too highly valued, and that the big gains can’t keep going for long.
I’ve been working, saving, and investing in the stock market for more than 20 years. I’ve seen some things. And probably the biggest lesson I’ve learned in my career is this: The stock market always bounces back. Even the worst bear markets and stock market crashes lead to buying opportunities. Long-term investors tend to keep making money — but you must be able to live with some short-term fear, doubt, and drawdowns.
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Let’s look at what I learned about investing by living through three historic stock market crashes.
1. Dot-com crash: Tech stocks don’t always keep growing
I graduated from college in 2001, amid the bursting of the dot-com bubble. Many famous internet start-ups like Webvan, Kozmo.com, and Pets.com went bankrupt, and their shareholders were wiped out. A college classmate got her first job out of college at an innovative, world-changing, stock-market-darling company called Enron. We were all happy for her, until Enron collapsed in an accounting scandal. The stock market was plummeting. I was new to the working world, but it already seemed like that world was ending.
Here’s what happened to the S&P 500 and the tech-heavy Nasdaq-100 index during the bursting of the dotcom bubble, from March 2000 to October 2002:
Here’s the lesson I learned: tech stocks don’t always outperform the rest of the market. They can be risky. If you want to make a concentrated investment in a tech-heavy Nasdaq-100 ETF like the Invesco QQQ Trust (NASDAQ: QQQ), keep in mind that booming growth stocks can go through big declines and volatility. Not every new technology that investors are excited about ultimately turns into a profitable business.
2. Global financial crisis: Housing isn’t always safe
In 2008, my wife and I had recently bought our first house, and had a new baby. I was still in the early stages of my career, working in the financial industry, trying to become better established both professionally and as an investor. Then the global financial crisis happened; massive banks failed, and millions of people lost their jobs and homes. It seemed that capitalism almost collapsed.
