NASDAQ 100 or S&P 500?

Should I invest in the S&P 500 (SPY) or the Nasdaq 100 (QQQ)? When deciding between investing in the S&P 500 or the Nasdaq 100, several factors should be considered:

 

Returns:
The Nasdaq 100 generally delivers higher returns than the S&P 500 across all timeframes, 12% vs 9% mean yearly return. However, these higher returns come with increased volatility, 27% vs 17%.

Risk:
Historically, the S&P 500 has experienced a maximum drawdown of -55%, while the Nasdaq 100's maximum drawdown was -83%. Additionally, the S&P 500 recovered faster, taking 1,773 days to return to its previous high, compared to the Nasdaq 100, which took 5,443 days.

Risk-Adjusted Returns:
When equalizing both assets in terms of risk, the Nasdaq 100 has consistently generated positive average annual alpha of 0.58% over the S&P 500, suggesting that the Nasdaq 100 on average, provides higher returns for every unit of risk.

Why Not Own Both?
Efficient frontier analysis shows that owning both assets offers significant diversification benefits. Historical data indicates that the optimal allocation is 65% in QQQ and 35% in SPY. This balanced combination maximizes returns while reducing risk, compared to holding 100% of either asset individually.

Conclusion:
While the Nasdaq 100 achieved higher cumulative returns over the period, it also involved significantly higher risk. So the answer to this question depends on how much risk you can tolerate. Remember, NASDAQ 100 took 15 years to recover its dot com loses, while the S&P 500 took 5 years to recover.

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Disclaimer:
This is NOT investment advice, the content here is for informational purposes ONLY.