I just had lunch with a friend who previously was an active investor. He was there right in the thick of it during the Black Monday crash in 1987 and the Internet bubble in 2000.
He made tons of money in the stock market in a short period of time, but his actions were driven solely by excess greed, refusing any advice to lighten his positions. He had a sense of invincibility and felt the stock market was heading much higher.
In 2000, when the NASDAQ traded above 5,000, my overconfident friend was so extremely bullish on the stock market that he decided to take out a reverse mortgage on his parent’s home to play stocks. He promised great returns, early retirement, and a new lifestyle.
The problem was he was investing in speculative issues that had minimal history and financial success. He thought the NASDAQ could rise another 30%.
At that level, he was thinking he would make over a million dollars, pay back the mortgage, and quit his day job to become a day trader.
Luckily, he did not quit his day job, as it’s the only thing he had left after the stock market imploded in early 2000.
New bubbles come and go. Each one is different and driven by different factors—the only commonality is greed.
We are hearing some whispers that this current stock market is bubble-like. While I’m not fully in agreement, I do feel the rally in the stock market to record highs has largely been driven by the Federal Reserve’s easy monetary policy, as is the case with stock markets around the world as global central banks from Europe to Asia cut interest rates.
The reality is there is no viable alternative in which to invest your money other than the stock market. Investment-grade bonds are yielding very little, and unless you are willing to take the risk and invest in bonds in Greece, Spain, Italy, or Portugal, you are out of luck.
There is little choice at this time. I don’t think the stock market is in a bubble yet, as long as the Fed maintains its easy money flow. But you should be careful; interest rates will inevitably rise, and then we’ll see traders making a mad dash toward the exits.
At this juncture, don’t fight the trend. (Read “S&P 500 Could Hit 1,700, but Weaker Stock Cycle Ahead.”) You will never win.
Ride the stock market higher, but at the same time, understand the current rate of the advance this year is not sustainable.
Yes, I feel there will be a pending correction; I’m just not sure when it will happen and by how much. The only thing I know is that a stock market correction will provide a buying opportunity.
Remember the story of my friend; look to lighten up on some of your bigger winners, especially those in the growth and technology areas.
Take some profits off across the board. There’s no shame in this. Greed is not your friend.