Signs of bubbly markets are everywhere. Commission-free apps have encouraged home-bound speculators to try their hand at trading tech stocks and options. Bitcoin soars—and plunges—on a daily basis. Gen Z and millennial investors have turned to the viral video app TikTok, where the hashtag #stocktok has 351 million views and everybody seems to be on the verge of becoming a “Teslanaire.”
Initial public offerings set a record last year. On Dec. 10, Airbnb Inc. rallied 113% above its offering price in one of the biggest one-day pops on record for a U.S. IPO. Just two days earlier, DoorDash Inc. went public and saw its stock rise 86%. Wall Street is offering customers ever more creative ways to amp up their exposure to hot investments: JPMorgan Chase & Co. is pitching to investment advisers structured notes that provide a leveraged bet on three popular exchange-traded funds from Ark Investment Management. Two of those ETFs are in turn heavily invested in Tesla Inc., whose stock rose more than 743% in 2020 and trades at 1,309 times it’s trailing 12-month earnings.
Jeremy Grantham, co-founder of asset management firm GMO, is warning of not just a bubble, but a “fully fledged epic bubble” fueled by “hysterically speculative” investor behavior. Byron Wien, vice chairman of Blackstone Group Inc.’s private wealth solutions business, recently predicted that the S&P 500 will fall almost 20% in 2021’s first half—but then advance to 4,500, up 19% from the start of the year. Against the backdrop of a pandemic-ravaged world, with millions out of work and living under lockdown, it all seems a bit out of sync. Dan Egan, managing director of behavioral finance and investing for robo-adviser Betterment LLC, sees a belief among some retail traders that “the Federal Reserve is not going to let the market, is not going to let companies, go bust.”
Now, it’s one thing to say prices look frothy and quite another to know when the market will turn. Grantham was famously prescient about the dot-com bubble, but his firm’s flagship fund had a tough 2020 because it was positioned so defensively. Whether or not 2021 turns out to be the year the market corrects, it’s clear that the question, “Is this a bubble?” is going to loom large on investors’ minds. With so much fear and greed swirling in the markets—and so much uncertainty looming over many people’s personal and professional lives—maintaining perspective requires concerted effort.
“Most of the battle is going to be mental, not financial,” says Juan Ros, a financial adviser with Forum Financial Management in Thousand Oaks, Calif. “You’re dealing with stress and anxiety, and with not letting emotions take over in a way that leads to poor financial decision-making.”
When emotions dictate financial decisions, returns suffer. As financial planner Carl Richards puts it in The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, there’s often a big difference between the gains investments earn on paper and the typically lower returns people realize after trading. “It’s clear that buying even an average mutual fund and holding onto it for a long time has been a pretty decent strategy,” Richards wrote in his 2012 book. “But real people don’t invest that way. We trade, we watch CNBC, and listen to Jim Cramer yell. We buy what’s up and sell what’s down. In other words, we do exactly what we all know we shouldn’t do.”
If you missed the five best days of S&P performance in 2020, you’d be looking at a -12% return, rather than a return of 16%. A Morningstar Inc. study found that over the past 10 years some of the biggest gaps between funds’ reported returns and the average returns of investors who used them were in equity-sector funds, which tend to see investors pile in after gangbuster returns are posted and bail out when performance sputters.
Financial planners and behavioral finance experts have an arsenal of strategies to help investors maintain their cool and focus on the long-term picture. Here are a few of their tips for clients who fall into three common categories.
For those gripped by the fear of missing out. Just as Instagram can make it seem like everyone else’s life is brighter and shinier than yours, social media can make it seem like everyone is getting rich day trading. And that may push you into riskier investments.
When clients with a severe case of FOMO come to Roger Ma, a financial planner and founder of Lifelaidout, he asks them why they need big returns, aside from the bragging rights. “If achieving your financial goals is reliant on you making 30% to 40% per year, it may be time to revisit your financial plan to make it a little more feasible,” he says. “It’s like the person whose whole financial plan is reliant on them becoming CEO of a Fortune 500 company. It might happen, but probably not.” A more realistic plan doesn’t necessarily mean lowering your goals—it could also mean adding to your regular savings if you can afford to. Watching your extra contributions build up over a few months can take some of the edge off any regret you may feel about missing the latest melt-up in Bitcoin.
Ma says FOMO is also showing up in clients who don’t like keeping their emergency fund in cash. After years of rising stock prices, it’s all too easy to do the math and imagine how much bigger that pile would be if you’d put it in Apple Inc. or even an index fund. Keeping the money safe but on the sidelines feels like a waste. “I say, ‘No, it’s not really,’ and remind them that the money is here to help in emergencies and give them some life flexibility,” Ma says. Remember, when the pandemic first hit the U.S. and the uncertainty about how many people would lose their jobs was at its highest, the stock market briefly lost about a third of its value. That would have been a terrible time to be selling stocks to help pay the mortgage.
For those stuck in analysis paralysis. All the news and data flying around about the markets can be overwhelming, and staying on the market sidelines while you figure out what to do can have a big cost. Ma’s way of dealing with that is to ask clients to look up a chart of the S&P 500 online and click to see its performance for one day, where you see every tick up or down. Then he says to go out five days, a month, a year, and then five years or longer. Clients see that a lot of the movements that felt so jarring at the moment don’t even register.
On the other hand, if you’ve already set up regular contributions into an account and you or your adviser have an automated process for rebalancing, inertia isn’t such a terrible thing, says Stephen Wendel, head of behavioral science at Morningstar. In this case, doing nothing means you’re still investing—and sticking to a long-term plan you put together in a less emotional time.
“It’s more when we’re rushed, when we think we have the inside scoop, when we think we know where the market is going, that we get into trouble,” Wendel says. It’s only human—in Wendel’s field, it’s called “recency bias.” Projecting the near future based on the recent past can work in everyday life, he says, but not in investing.
For those who are a bundle of nerves right now. When Covid-19 started breaking out in the U.S., Thomas Yorke, managing director of Oceanic Capital Management, heard from a client who’d had someone she respects say that the pandemic would be a lot worse than most people thought and she should get out of the market. “I said, ‘I understand your concern, and I’m not here to tell you that markets will not go down,’ ” Yorke says. “ ‘But the problem with that strategy is that the markets won’t call us and tell us when it’s time to get back in.’ ”
There’s nothing wrong with looking at your financial plan when markets are highly valued and considering whether you need to rebalance so you aren’t taking more risk than you expected to. But once you have a plan you’re comfortable with, one way to guard against being reactive is to set up written safeguards before you’re in the thick of a volatile market or an emerging crisis. That might mean writing out the specific situations that would lead you to consider changing your asset allocation, Wendel says. “Write out what you’re trying to accomplish, and what the specific thresholds are for making changes,” he says. “You want to get your expertise on paper, so you can look at it and revise it over time.” When you really need it, you’ll have it set down clearly “and it’s not just all soup in your head,” he says. Another way to make it harder to make rapid portfolio decisions is to set up a rule with your adviser or partner that says you must wait three days before making a move. The way the news is moving lately, a lot could change in that time. —With Lu Wang
"Market" - Google News
January 22, 2021 at 04:00PM
https://ift.tt/3sMBdlJ
Stock Bubble: What to Do If It Seems Like Markets Are Too High - Bloomberg
"Market" - Google News
https://ift.tt/2Yge9gs
https://ift.tt/2Wls1p6
/cloudfront-us-east-1.images.arcpublishing.com/bostonglobe/VNG7YMZTRWJ5WBFTJ5NVETPCQI.jpg)
No comments:
Post a Comment