IS GREED GOOD AGAIN IN INVESTING?
by Rob Russell
Ah love is in the air. Love between friends and family, sure, but I’m not talking about that kind of love. I’m talking about a potentially profitable, yet danger prone love.
We’re witnessing more and more investors and even some clients fall prey to the siren song of the equity markets. Being lured into this torrid and potentially toxic love affair by believing that the ‚Äòall clear’ has sounded and nothing but blue skies and profits lay ahead.
Oh yes, ‚Äògreed is good’ again in investing.
The tough lessons learned just 7 years ago during the Great Recession are just a faded memory, but we all know how the markets have a way of humbling us just when we feel like we’ve got it all figured out. In 2007, a lot of “conservative” savers and DIY investors thought the market was going to go straight up‚Ä¶evidence they too caught the greed bug.
And now we’re seeing a lot of the same signs ofinvestorsentiment.
I believethe ‚Äòplumber and barber sentiment index‚Äò is near an all-time high ‚Äì which is what I call it when barbers, plumbers, cabbies, and other similar occupations are talking about the stock market andgiving’hot’ stock tips‚Ä¶a lot like 2007 all over again.
This love affair with the markets reminds me of thewise old saying, ‚Äòthose that forget the lessons of the past are doomed to repeat them.’ Now, I’m not professing that the markets are going to crash very soon, rather I’mseeing similar euphoricsigns that we witnessed in 2007 when I encouraged retirees and aspiring retirees to start going conservative and putting money on the sidelines. Perhaps now is the time to start taking some calculated precautions.
Even the ‚Äòsmart money’ is reportedly moving money out of stocks and targeting investments that aren’t correlated with the markets. Tiger 21, a peer network ofhigh-net-worth investors who collectively manages approximately $30 billion in investments, has lowered their allocation to stocks by 6% from over a year ago according to their most recentsurvey. Where’s the money that was in stocks going to? To private equity and real estate, both of which have little if any correlation to the equity markets, possibly marking a sign that better gains and less uncertainty may be foundelsewhere.
2015 stands to be a historically volatile year and at some point in the nearish future the market will find a way toward equilibrium and unfortunately humble a lot of investors who caught the greed bug.Check out some of these recent financial headlines for a clue about the coming market roller coaster:
“Sticker shock! Stock valuations at 10-year high” –CNBC
“Are falling oil prices a sign of a coming bear market?” –Dallas News
“Expect global monetary uncertainty to impact markets in 2015‚Ä≥ ‚ÄìEconomic Times
As Einstein said, “the definition of insanity is doing the same thing over and over again and expecting different results.” Will the next market correction or crash be different than the last few? Probably not much, but if you’re exhibiting signs of the greed bug (nausea, fever, chills, and an insatiable appetite for risk) thentake a fresh look at exactly you have in the market (stocks, stock funds, bond funds, etc.).
I concede that while 2015 is expected to be a rough and tumble year it will likely be a positive year in the markets overall, but what if it isn’t?
The best preventive medicine you can take right now is the ‚ÄòPrudent Investor Rule,’ where you take 100 minus your age and the remainder is the maximum a prudent person would have in the market. (Remember, even bond mutual funds are traded on the market and as such inherently move with stocks, they’re correlated). If you’re 45 years old (100 ‚Äì 45 = 55%) then 55% is approximately the amount a prudent investor should have invested in anything that moves with the markets.
Disclosure: Rob Russell offers advisory services throughCentum Capital AdvisorsLLC, an independent RIA.