Don’t get caught up in the market hype - opinion

So after all the ups and downs, the global business lockdown, and more than a million dead, 2020 turned out to be a good year for financial markets.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
“It’s important to learn to say no. With tours and all of that stuff, there are so many aspects that go into it. It’s easy to have so many people around you saying, ‘Oh yes, yes, you can afford this, you can afford this,’ and then all of the sudden you’ve spent $20 million on your stage, and you’re like, ‘Where’s my money?’” –Britney Spears
So after all the ups and downs, the global business lockdown, and more than a million dead, 2020 turned out to be a good year for financial markets. For certain sectors triple digit gains were the norm. It’s much easier to make money when everything is appreciating. The temptation for investors is to start taking more risk than they are able to handle. Over the last month I have received many phone calls from clients who all of the sudden want to sell “boring” assets in their portfolios and start moving into more speculative individual stocks. Who needs a stock that pays a 5% dividend, and has been a slow and steady climber for years, when you can buy a Chinese electric car maker or the hottest new IPO which is sure to triple in a matter of weeks! Whether or not this makes sense is based on each individual investor’s risk profile. But the danger in this approach is that investors are becoming too confident in their investing abilities.
Flashback to the end of 1999 when the market was surging from being led by the euphoria in technology stocks. I remember speaking with someone who was telling me about the stocks he was buying. He said, “I don’t even know what they do. I just know they have 4-letters in their stock symbol (that was a sign that it traded on the NASDAQ) so it’s gotta go up!” In some respects it seems like we may be about to repeat history.
Research doesn’t bode well
I will repeat something that I have mentioned here many times. Tony Giordano, a senior financial adviser with Vanguard, quoted a piece that appeared in The Journal of Economic Perspectives back in 2015, titled “Overconfident investors, predictable returns, and excessive trading.” The report said: “Investors attribute strong portfolio performance and high returns to their skills, which leads to self-assurance. When the same investors experience poor performance and low returns, they attribute it to bad luck. The result: persistent overconfidence.”
Call it greed or whatever but I’ve seen too many times where after a good year in the market, investors become the definition of “FOMO” (fear of missing out) and chase after stocks that have appreciated tremendously. And you all know what eventually happens, and it usually doesn’t end well. Remember the old investing adage; “Buy low and sell high.” Yes I quoted Britney Spears above, and it’s not a mistake. Sometimes you just have to say no and not go for the flash and spectacular, rather, bank some of your money.
Stay strong
Resist the temptation. Giordano sums it up when he says: “If strong market performance makes you headstrong with the possibility of quick returns, avoid the temptation to go after investments that will expose you to more risk than you’d feel comfortable with under ordinary circumstances.
On the flip side, if poor market performance tempts you to flee to cash, consider the longer-term implications, which include missing a potential market rebound and losing future growth opportunities.”
Asset allocation
I have said it a thousand times but it bears repeating. Creating your asset allocation, or the mix of stocks, bonds and cash in your portfolio, is the single most important task for an investor. Many studies have shown that the proportion of stocks, bonds and cash held in a portfolio has a greater effect on its returns and volatility than the individual investments that are chosen.
That is why after assessing one’s investment goals, it’s of the utmost importance to create an allocation that can help you achieve the aforementioned goals. Especially after the market run up of the last few years it’s important to re-asses your portfolio. In time periods with solid stock returns many investors can find themselves with portfolios much more heavily weighted toward stocks then they bargained for. One of the most overlooked aspects in long-term investing is the need to rebalance a portfolio. Rebalancing is important for two main reasons. First of all, it keeps your portfolio in tune with your long-term goals and second, it keeps your asset allocation in line with your risk level.
What’s the upshot of all of this? Stay the course that you started out with. Part of your financial plan took into account good years in the market. Take the money and say “thanks.”
But don’t get over confident and start getting more and more aggressive and end up making costly mistakes. If you follow your asset allocation and rebalance your portfolio you will be able to achieve your financial goals.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.; [email protected]