Thoughts on a "bull" market
Hot stock markets are promoting a greedy approach to investing
The financial story of the year to date has to be the fantastic performance of the stock markets following a plunge caused by U.S. President Donald Trump’s trade policies.
I’m celebrating the gains as much as anyone, but I also wonder about the downside potential for markets producing returns way above their long-term averages. Some segments of the investment industry do not share my concern. They think you could be doing more than just owning stocks and funds to make money right now.
A sampling of industry pitches for investors who buy this line of bull:
Margin trading: Borrow money from your broker to buy stocks and magnify your gains
Options trading: Explore the mystique of a “higher level” of investing
Private equity and credit: All the big financial players are investing in privately held assets - why not you?
Alternative investments: If your portfolio is just stocks and bonds, you’re missing out
There is nothing intrinsically wrong with margin trading, options, private equity or alternative investments. But indulging in them adds a layer of potential uncertainty and risk to a portfolio that will quite likely be exposed in the next stock market downturn.
The reality is that you don’t need any of this stuff to be a successful long-term investor.
Margin trading magnifies losses as well as gains and can be an absolute wealth destroyer if mishandled. Options require a substantially higher level of expertise than stocks and funds. Private equity and debt are staple holdings at pension funds, which have teams of analysts to manage their holdings. Managerial expertise for retail products may not match up, even as hefty fees are charged. Also, pay close attention to your ability to cash out of your holdings on short notice.
As for alternative investments, they hold out the promise of returns that are independent of stocks and bonds. There is some merit to the concept of owning alt investments, which can include commodities, property, hedge funds and private equity and debt. But, again, there’s a question of whether the results you get as a retail investor will match the hype and justify the fees. Also, don’t buy any alt or private debt/credit product that has not demonstrated some resilience in past down markets.
Today’s bull market conditions are a huge win for investors and a reminder of why we hold stocks in the first place. The downside of bull markets is that they promote a greedy approach to investing. Investors lose their focus on risk, and the investment industry exploits this.
What caught my eye recently
A recent New York Times piece on the rising cost of visiting a Disney amusement park is a must read because it explains a lot about why people feel so unhappy about the state of the economy and their finances. What was once a middle-class lifestyle increasingly feels unaffordable.
Boycott naysayers, check out this CNN article on how U.S. tourism is lamenting the drop in visits by Canadians, and the resulting decline in revenue. Barring a credible deal on tariffs, this winter will be a real test of our commitment to non-U.S. travel.
I know the investment industry worries a lot about how to connect with Gen Z, which has an openness to taking advice from influencers on social media. This piece from Canadian Press offers some insights on what Gen Z is looking for in financial advice. I have some thoughts on what the investment industry needs to do to relate to Gen Z. Stay tuned.
What I’m listening to
Ottawa singer-songwriter Kathleen Edwards is in fine form on new her album, Billionaire. The song Need A Ride is a highlight - Edwards’ amazement at “people who get worked up about the strangest things,” paired with guitar backing by Jason Isbell.
Check this out
The guys at the Rational Reminder podcast and I have the best conversations about investing. Here’s our latest.