It seems like most investors I speak with define a market bubble as an extended period when valuations go higher, despite their gut feelings (and Facebook feed) telling them everything should be getting worse.
In that context, today’s AI boom can feel like a replay of the late-1990s dot-com era. But there are some key differences worth noting.
First, in the tech bubble, the stock prices were growing exponentially relative to earnings. That isn’t what we are seeing today.
In four years of the dot-com boom, the information technology index rose 439% while earnings only grew 80%. Over the last four years, that same index has climbed just 94%, relative to a 73% increase in earnings.
Second, when companies increase their earnings, they tend to increase their valuations. And today’s companies have been earning a lot more than expected.
Third, the dot-com boom was all about tech stocks. This year, tech stocks have done well, but most people probably don’t realize they have been outperformed by the far less exciting utilities sector.
Finally, I make no promises that the stock market will keep going higher.
Corrections happen all the time, and I wouldn’t be at all surprised to see a normal-sized pullback. I mean, take another look at the chart above. It was just six months ago that the S&P 500 was down 18.8% for the year.
I also wouldn’t be surprised if something unexpected happens (having nothing to do with AI) that causes the market to go down significantly. Surprises like COVID and 9/11 are notably hard to predict.
Rather than making predictions in an attempt to time the market, my suggestion is to know thyself. If you can’t stand the thought of your portfolio going down by 30% in the short run, don’t own a portfolio of investments that are at risk of going down 30% in the short run.
Buying some bonds today will do a lot less damage to your long-term performance than selling stocks after a significant decline.
But if you can hold on for the ride, I suggest you do just that. As this chart points out, there will always be reasons to sell — but successful investors are the ones who can look past the headlines and remind themselves, this too shall pass.
Personal note:
Last weekend, we took a break from sports and headed to Rockport for fishing with friends.
The kids caught a lot of redfish and black drum. I mostly just cheered them on, took pictures, and caught some bait.
When it comes to writing about investments, the disclaimers are important. Past performance is not indicative of future returns, my opinions are not necessarily those of TSA Wealth Management, an SEC-registered investment advisor, and this is not intended to be personalized legal, accounting, or tax advice etc.
For additional disclaimers associated with TSA Wealth Management please visit https://tsawm.com/disclosure or find TSA Wealth Management's Form CRS at https://adviserinfo.sec.gov/firm/summary/323123
GOLD & SILVER …..everyday 🔥 new record highs your “ snapshot “ for 75+ yr old investors! ( should gold Rolex watches & other such personal possessions be hocked ? )
ROCK PORT WEEKEND -nice 🎣🎣 images ! Thanks !