“Is the US Stock Market in a bubble?” – This is a question I’ve had to field a few times recently. The question is prompted by some traditional valuation metrics and by the recent performance of high flying stocks like Tesla, Amazon, Apple and Google.
Newspapers, Twitter, 24 hour Financial TV – They are all filled with people making forecasts and trying to appear knowledgeable. Some will get lucky and be right, but most will be wrong – they’re all guessing about an unknowable future (and usually trying to sell something).
“We have two classes of forecasters: those who don’t know – and those who don’t know they don’t know” – J.K. Galbraith
From highly respected economist Irving Fisher who said that stocks had reached “…a permanently high plateau” on the eve of the great crash of 1929 to Fed Chair Alan Greenspan who spoke about “irrational exuberance” in the stock market in 1996 before the S&P500 went on to gain 31% in 1997, 27% in 1998 and 20% in 1999.
As a financial adviser, my role is to guide my clients to make the right choices about their money, to help them live the life that they want to lead.
I do not believe we can gain a timing advantage over the market – I have not seen any reliable evidence of anybody doing it successfully and consistently over time.
My main takeaway from the tumultuous market that was 2020 is crystal clear – At their most dramatic turning points, economies cannot be forecast and markets cannot be timed. Instead, having a long-term plan and sticking to it once again demonstrated its enduring value. “Waiting for the pullback” or “Waiting for the economic picture to clear before investing” turned out to be formulas for significant underperformance, as is most often the case.
Speculation vs. Investment
The investment universe is always full of crazy stories, at the time of writing dominated by Reddit forums and wild price swings in stocks like Gamestop, Blackberry and AMC. It remains to be seen how this one plays out – the narrative is that of the little guy beating the big hedge fund.
However these stories usually end up badly for most participants, and its certainly got nothing to do with investment. Speculative frenzies have been a feature within markets since the dawn of time, but usually end up as blips in the long term growth of economies and stock markets.
Over time investors who remain disciplined, making regular contributions to investment or pension plans, riding out temporary declines and taking a long-term view have been rewarded.
Markets Have Rewarded Discipline
Investment Time Horizon
Holding cash is a sensible strategy if you are investing for large near term expenses, those occurring in one, two or three years from now such as college expenses for your children, a home extension, new car purchase or some other big ticket item.
However cash is usually a poor strategy if you are investing money for the long term (say ten years plus) whether in a retirement account or regular investment account. Holding cash will not keep pace with inflation, especially nowadays with interest rates at zero or below. Perplexingly, household deposits at current non-existent interest rates are higher than ever before see here.
The simplest wealth creation strategy over generations has been investing in all the great companies of the world – in other words investing in the global stock market.
Diversification takes the guesswork out of investing. From year to year we cannot tell which companies or which countries will outperform. This is why we invest in low-cost funds which in turn invest in all corners of the globe, from Brazil to Canada, South Africa to Sweden, Australia to Japan and everything in between. One fund we favour holds ownership stakes in more than eleven thousand companies across the entire world.
A World of Opportunities
Investing is a long game. I believe that the only way to capture permanent return is to ride out temporary declines. I do not believe in trying to outguess the market, or chasing past performance. The financial markets have rewarded long-term investors through booms, busts and everything in between. To quote Charlie Munger, Warren Buffett’s business partner: “The first rule of compounding: Never interrupt it unnecessarily.”
Ardbrack Financial Limited.
021-4773833 / 083-4115277
Disclaimer: The content of this article is for general information purposes only. It does not constitute tax or investment advice as it does not take into account the investment objectives, knowledge and experience or financial situation of any particular person or persons. You are advised to obtain professional tax and investment advice suitable to your own individual circumstances. Ardbrack Financial Limited makes no representations as to the accuracy; validity or completeness of the information contained herein and will not be held liable for any errors or omissions.