For the first part of 2018, the stock market inched higher almost daily, continuing the record bull run that had made the media rejoice since the Great Recession. Bold headlines across newspapers, magazines, and cable TV gleefully joined the rally: “The Dow’s Endless Growth,” “Stock Market Euphoria.”
However, such headlines do real financial harm. They envelop investors in a false sense of security that they can give in to their greed and keep buying while the market is high, or let the fear take over and join the rapidly accelerating sell-off once the first signs of a downside show up. Essentially, investors do the opposite of what they should do—they buy high and sell low.
If we look at fund flows of individuals over time, for example, we see that investors typically buy the most close to market peaks and sell the most close to market bottoms.
The issue is that most investors are individuals who have a day job—investing is not their primary occupation. Their “research” typically consists of the daily headlines, and they tend to act according to the media’s prominent headlines, be they bullish or bearish.
The fear-greed cycle goes like this: When markets are declining, investors tend to hit the panic button and sell out their stocks to try and protect your investments. Most of the selling takes place near the lows. Once markets start rallying, investors keep selling because they don’t believe in the rally and just want to get some of their money back. Then, when they realize the rally is real, their greed takes over, and the buying ensues. However, this buying tends to occur at or close to market peaks.
When we’re close to a market peak, we should be selling off our stocks to those who are willing to overpay—those “greater fools” who let their greed take control, those who are influenced by the bold headlines. We must realize that the records being reported by the media are records for a reason—they occur because previous limits have been exceeded. When we see such bold headlines, we must see them as a sign that the cycle is reaching its maturity, not just beginning. We should take extra care to protect our investments in this instance.
Take today’s headlines, for instance. “Record-Low Unemployment,” “Booming Stock Markets.” When the media is broadcasting such headlines as a sign of the ongoing economic recovery, history beckons us to be cautious.
The media will try to sell every advance to a previous level as a sign the next record bull run is just around the corner, but, as an investor, you must keep in mind that this has nothing to do with your money or investing. As an investor trying to save for your retirement, “getting back to even” isn’t a viable investment strategy. The markets will always go through cycles, and a recovering market just means you are recovering your losses from the previous decline, not growing your initial investment.
Gold, on the other hand, has outperformed the stock market over the past two decades, but the media—thus, most investors—keep chasing the worst performing asset class instead.
Let me bring this home.
When the stock market grows, so does the risk of your investment, i.e., your potential for loss. Investors should get excited about investing when markets decline instead of when they rise, but they react the opposite way.
So does the media. Declining markets don’t sell headlines; thus, they don’t sell financial products offered by Wall Street. Bull markets are way more fun for all parties, including investors, who just want to make money.
Investing is a very complicated game, and people should study it carefully because they play using their hard-earned money. But they don’t invest any time in learning the game. Would you take your entire 401(k) to Vegas and gamble with it? Of course, you wouldn’t. Yet, some people gamble with their retirement savings in the virtual casino of the stock markets, hoping and believing their savings will grow down the road. Afterall, the media is telling them that’s what they should do.
Let’s look at how well this is turning out.
You’d wonder if the odds at a Vegas casino are actually high when you consider that most investors lose money in the markets over time due to fees, emotions, and mistakes.
A successful investor must be part historian, statistician, financial analyst, and economist, with an aptitude for fortune telling. Even if you add a good deal of experience on top of that, successful long-term investing remains a challenge. Markets are inefficient and in many ways affected by central banks and politicians.
With markets trading at record levels and monetary policy tightening around the corner, this might be a great time to not do what the media is telling you to do. It might be a great time to sell your stocks to one of those “greater fools.”
If you want to protect your investments from the stock market bubble, schedule a free consultation with me, and I’ll walk you through how you can invest in precious metals.
About Kevin Troy
Kevin has spent over 16 years in the financial industry, focused primarily on precious metals as investment assets. He has published many articles on buying and selling precious metals along with the best entry and exit strategies for various financial assets. He has helped thousands of clients protect, preserve, and safeguard their investments with precious metals and has been with Gold Alliance for more than two years as a leading Sr. Portfolio Manager, overseeing a large portion of our clients’ portfolios.