I don't know if the return of Nasdaq 5000 is a screaming bull signal or another canary in a coalmine, but here are a few additional takeaways to hopefully help you be better prepared to act after an extended runup in tech-sector valuations.
1. Obsolescence, competition and commoditization.
These are factors in any sector, but the damage done by them is especially acute in the technology arena. New products become useless very quickly, or eventually competitors come up with a new and improved mousetrap, or competitors compete on price with a similar or "good enough" product. All three of these happened in 2000. For all of history, there has never been a technology company that wasn't felled by one of these. Even mighty Apple almost disappeared twice.
2. The bears and the bulls will both get it wrong.
When the bears seem to warn too early and the bulls seem to change too late, how do you know who to listen to? We can all come up with our own "top 10" reasons to be bearish and bullish no matter what the market is doing. I say you listen to both, but be more concerned with being properly diversified and investing based on your own risk tolerance, time horizon, and goals. None of the talking heads will be there for you when the chips are down.
3. Don't abandon the sectors that aren't working.
In 2000 with technology, and to a large extent with financials in 2007, investors should have learned that they need to keep a lid on how big a portion of their portfolio becomes concentrated in too few sectors. Rebalancing isn't just for the flying Wallenda's!
4. Don't just know what you own—own what you know.
You've heard this countless times before, made popular by famed Fidelity Investments portoflio manager Peter Lynch. But seriously, when stocks are down, following this rule will help give you the confidence that you need to stick with your stocks when the inevitable correction hits us. You don't want to ask yourself "What the heck is this and why the heck did I buy it?" after it's down a lot.
Fifteen years is a long time, and the investing world has moved on from Nasdaq 5000. But let's not fool ourselves: The reality is that a whole new generation of investors will probably go down the same road again. So let's keep reminding each other of these lessons, and we'll create our own educational validation. Being better equipped to recognize the early signs of an asset bubble, or at least having the ability to question the conventional wisdom of the time, is a critically important exercise. Mathematics can help, but in the end it doesn't stop anyone. There is no silver bullet P/E ratio, or any other metric, that definitively indicates an asset bubble or, for that matter, a reason to stay invested.
—By Mitch Goldberg, president of ClientFirst Strategy