Investors worried about how high valuations have gone relative to historical averages may be concerned that we’re currently in the midst of a bubble right now. Indeed, it’s hard to find value on the stock market right now.
For those concerned about capital preservation heading into retirement, the tradeoff of owning fixed income securities right now and generating essentially zero income or taking on more risk and getting higher yield in equities seems like a no-brainer.
Accordingly, we’re seeing capital inflows into the stock market fueling a red-hot market that seems to show no signs of slowing any time soon. Pick your catalyst. Whether it’s central bank stimulus that provides money that’s too cheap to ignore, or the aforementioned “TINA” (There Is No Alternative”) trade, equities seem like the place to be right now.
Of course, this sort of mentality is exactly how bubbles get started. Piling into a trade because it’s going up and calling it a momentum trade can be disastrous if prices turn around and go in the other direction. As the popular phrase goes, “stocks go up in an escalator and down in an elevator.”
Accordingly, having a defensive mindset with portfolio construction is important. Ensuring one is well-diversified, with stocks that are not highly correlated is a great way to smooth out returns over time. For those worried about being in a bubble environment but want to stay invested, such an investment strategy is a prudent one.
Invest wisely, my friends.
