FREE NEWSLETTER
The proposition of an article I recently read was “this is the dumbest stock market in history.” Why is it dumb? In part because of an increasingly popular approach to investing—one that most in the HumbleDollar community, including myself, subscribe to. According to the article, passive index investing is “the very definition of dumb money, because indexers buy stocks without any regard to valuation.” Here are some other points that caught my attention in the article, which I will link to in the comments:
-Fewer and fewer people are actually making a market in stocks using their brains. Most index fund investors are just blindly buying, assuming that someone else is minding the store.
-The dumb stock market, built entirely on blind faith, wouldn’t matter so much if the numbers passed a sanity test. The problem is, they don’t.
-Due to bets on AI, a single company, Nvidia, is worth substantially more than all of the 2000 companies in the Russell 2000 index combined.
-Metrics such as price per earnings and the ratio of total stock market to GDP indicate that stocks are priced at historically high levels, close to valuations during the 1999/2000 bubble.
The conclusion of the article is that investors need to stress test our so-called risk-tolerance sooner rather than later. We may be taking on far more risk than we realize.
After a conversation with my son in which he pointed out I am quite conservatively invested if my pension is included as part of my retirement portfolio, I wondered if he had a point and if I should increase my stock allocation (currently around 63% for my retirement funds). I decided to stick to my “kiss rebalancing goodbye” approach. Still, I have moved a good bit of money from U.S. to international stocks as valuations are not as high overseas. The declining value of the U.S. dollar was also a consideration.
The only individual stock I own (“using my brain” in the parlance of the referenced article) is that of my former employer…shares I essentially got for free, so no brainwork involved. That stock is up over 600% in less than 4 years.
So, it appears I will continue along with my crowd for better or worse. But the logic of this article does have a way of undermining my optimism. I’m wondering what others in the HumbleDollar community think?
Only during massive market crashes or prolonged recessions will we be free of these types of articles, warning of impending doom and how “the next 10 years will see much lower returns.”
The only answer is to ignore these articles and rebalance according to your investment plan.
Agreed.
Recently, I see a lot of “no one can time the markets, but ….”. They then proceed to explain why this time they actually can time the market, and people should be changing allocations, moving to cash etc.
If you pick a plan and set up allocations that match your risk profile, then just ride on through all the noise. Don’t say you are invested long term and then keep thinking short term. Surely that will just drive you mad.
If you define timing the market as saying when the crash will occur, then you are correct.
But there is nothing wrong with saying a crash is probably coming, but we don’t know when. History has shown that this will happen. The problem is, the market can stay crazy longer than you can stay solvent.
Equities are volatile, so there will always be a “crash” coming. If you are a long term investor, set your allocations, rebalance according to a fixed schedule, stop looking at the daily financial news and get on with living a good life!