Readers of this column are likely aware of some of the
bizarre events transpiring in the equity markets today. Among them, stories of
Reddit chatrooms driving short squeezes and massive single-day moves (in both
directions) in companies with relatively weak fundamentals. If parts of the
environment feel like the 1990’s dot-com bubble to you, I’m right there with
you.
Some of the numbers are eyebrow-raising, to say the least: Morgan
Stanley reported growth of approximately 900,000 new self-directed accounts in
the second half of 2020; Charles Schwab (which is now combined with TD Ameritrade)
has been routinely breaking records for daily client trades, processing some 8
million daily; the online trading platform, Robinhood, which targets
millennials and younger investors, saw 500,000 downloads in December alone; a
record 10 million new brokerage accounts were opened in 2020.1
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See Why You Should Stick to the Fundamentals, Quality and Diversification!
If this current narrative surrounding the market has taught
investors anything, it is the importance of sticking to fundamentals, quality
and diversification. Instead of falling prey to short-term, single-day moves, the
key is to stay focused on a diversified portfolio of quality,
earnings-generating companies that can positively impact your investments in
the long-term. It’s better to focus on the facts and data when it comes to
making future decisions!
To help you do this, I am offering all readers our
just-released Stock Market Outlook report. This report contains some of our key
forecasts to consider such as:
- Economic expectations for 2021
- 2021 capital markets expectations
- A look at Covid-19 and vaccine distribution
- What produces 2021 optimism?
- What of U.S. GDP growth?
- A look at U.S. continuing claims for unemployment and Covid job data
- Zacks Rank S&P 500 Sector Picks
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released February 2021 Stock Market Outlook2
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Normally, I would support retail investors opening accounts
and starting down a long-term path of saving and investing for the future, but
not in this format. I’m concerned many of these investors are new to investing,
and are trading on speculation, over-concentrating in ‘hot’ positions, and
committing too much of their liquid net worth to short-term trading. I hope I’m
wrong, but there is a long history of this type of enthusiasm/euphoria leading
to major losses. History tells me that volatility and ‘heat chasing’ mints more
losers than it does winners.
There is also growing evidence that retail investors are pushing
even further out onto the risk curve by using leverage. Investors borrowed a
record $722.1 billion on margin through November 2020, Charles Schwab reported
a 16% increase in average margin loans balance in the last three months, and
analysts at Piper Sandler noted that off-exchange trading – which captures the retail
market – accounted for 48% of total trading in the first two weeks of January. Investor
enthusiasm could be approaching a crescendo, which has historically given way
to a reckoning of some kind.3
The more I see the stories build and engulf the financial
media narrative, the more I am inclined to double-down my focus on quality and
diversification. The temptation of triple-digit gains with just a few trades –
and the ‘fear of missing out’ that many investors feel when they see
get-rich-quick stories – often lures even the most disciplined investors to get
in on the action. Doing so goes against just about everything I’ve ever learned
about investing, however. When the market’s sirens are singing, it’s crucial to
stick to the plan.
Most investors can get where they need to go over the
long-term by owning a diversified portfolio of stocks (generally speaking, 30 –
60 stocks). Positioning a portfolio across sector, style, size, and country
will almost always provide exposure to the best performing areas of the market
while minimizing the impact of the weak performing areas of the market.
Volatility gets smoothed out over time, and an investor can earn attractive,
equity-like annualized returns. It doesn’t have to be more complicated than
that, and investors don’t need a huge win in a single stock bet to get there,
in my view. The journey to long-term wealth is also a lot less stressful, in my
experience.
Bottom Line for
Investors
In my view, some of the bizarre behavior we’re seeing in the
market is a clear signal that investor enthusiasm is approaching a crescendo,
which usually gives way to a correction of some kind to clear out some of the
froth (and, unfortunately, wipe-out many over-risked and over-leveraged
investors). My advice: avoid getting caught up in the swirl of rumors,
chatrooms, sharp one day move, and hot stocks, and steady your investment ship
to stay focused on a diversified portfolio of quality, earnings-generating companies.
If you want to take some chances on some individual stocks or short-term
trading, fine – but my advice is to never commit more than 10% of your liquid
net worth to it.
If you choose to give into fear and sudden emotional investing, you could miss out on positives in store for the market not only this year, but also down your financial timeline. To help better position yourself for what’s to come, I recommend focusing on what matters – key data points and economic indicators that could impact your investments. To help you do this, I am offering all readers our Just-Released February 2021 Stock Market Outlook Report.
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:
- Economic expectations for 2021
- 2021 capital markets expectations
- A look at Covid-19 and vaccine distribution
- What produces 2021 optimism?
- What of U.S. GDP growth?
- A look at U.S. continuing claims for unemployment and Covid job data
- Zacks Rank S&P 500 Sector Picks
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Disclosure
1 Wall Street Journal. January 25, 2021. https://www.wsj.com/articles/small-investor-surge-shows-no-sign-of-slowing-11611574200
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 Wall Street Journal. December 27, 2020. https://www.wsj.com/articles/investors-double-down-on-stocks-pushing-margin-debt-to-record-11609077600?mod=djem10point
4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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