The madness of markets

As an investor, it’s generally not a bad idea to ignore what’s going on in your portfolio most of the time.

At the very least it can be distracting and at worst it can be a source of unnecessary anxiety!

The markets feel like they have gone a bit mad in recent months so this advice is just as important today as it’s ever been.

At the start of the pandemic there was a fall of 25% or so but since then global markets (developed and emerging combined) have gone up by more than 10%.

Some sectors and companies have delivered far higher returns. For example, lockdown winners like the ‘FAANGs’ (Facebook, Apple, Amazon, Netflix, and Google) have risen collectively by 45% since the pre-pandemic market high.

In May 2020, Elon Musk, Telsa’s CEO, tweeted that its share price was too high, and it fell 10% overnight to $80, yet Tesla’s share price has since grown almost ten times to $804 on 10 February 2021. Today Tesla’s market capitalisation is now larger than the next nine global car manufacturers combined, including Honda, VW, Renault-Nissan, and GM. Let’s not even mention Bitcoin!

Are these fair prices or are they overvalued?

The rational investor would say that the market is simply looking beyond the pandemic to a time of global recovery and a more normal world, making the market the best judge of prices.

Perhaps you’re not feeling that way and have concerns that markets are in a bubble.

Others may see the extraordinary returns from certain sectors and companies and feel a sense of FOMO (fear of missing out) that they’re not more heavily invested in tech stocks or Tesla, for example.

The problem is that the markets may be right…or wrong. No-one knows!

The one thing we know for sure is that it’s impossible to know either way with any certainty. The evidence tells us that even professionals have little ability to time entry into or out of stocks, sectors, or markets successfully.

Markets can remain seemingly mad for a long time. As economist John Maynard Keynes famously once said:

“Markets can remain irrational longer than you can remain solvent.”

So, what should you?

Sensible investing is about remaining highly diversified across markets, sectors, and companies to try to smooth out returns as much as possible over time. Maintaining this balance is important – it may not be as exciting as taking a punt on Tesla or Bitcoin, but it will reap its rewards in the long run.

Remember that being diversified means you will benefit from being in the companies and sectors that do well. In 2020, the developed global stock markets returned around 12% in GBP terms. Of this 12%, half was attributed to the top 10 stocks. The FAANGs alone represented 30%. That’s surely enough exposure for most!

Stick with the plan and try not to look at, or think about, your portfolio too much. Attempting to second guess the market is a fool’s errand.

We understand the pandemic causes continuous uncertainty which can lead to anxiousness about your investments, don’t stew on it – get in touch with your usual CPW team member so we can chat it through or book a no obligation call by clicking here.



MSCI ACWI Index in GBP terms from 19/02/2020 to 10/02/2021
GSI (2021), The recent performance of Growth and Value

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