Despite the recent tariff-driven volatility in the market, we have had a huge rally off the bottom in late December—a move that was big enough that even the most ardent bear has to be a believer in the strength and durability of this stock market.
Until the most recent craziness over the China deal, the health care sector was about the only thing that wasn’t up.
And once the market figures out there’s no real threat to our health care system from the ultra-liberal socialists running for president, even that will change.
Here comes the bad news…
All this positive energy and upward momentum created two traps for investors—traps that historically have cost the little guy a ton of money.
The first is called FOMO, or the fear of missing out. This is where you can’t stop yourself from trying to get in on the party.
If you’ve been sitting on the sidelines since last year waiting for the crash and recession the talking heads had convinced you were coming and now your cash is burning a hole in your pocket, this might apply to you.
Been there, done that. It doesn’t work. In fact, when you hear stories about the little guy finally getting in on the rally, it’s over. Guaranteed.
If you missed the rally—unless you can find bargain basement-priced stocks—it’s time to take a step back. Even with the selling we’ve seen in the last few weeks, the pickings are slim. And there are some out there, but for most of us, it’s time to bite the bullet.
Do I know for a fact that the market topped out in the 26,000 area? No. No one does. But what I do know is chasing a market that’s moved up 20% from its low in December is fool’s gold.
It’s tough to watch money going into other people’s pockets, but now is when you have to fall back on fundamentals and leave the pie-in-the-sky stories, the big-gain days and the excitement the media adds to a run-up for the lemmings.
If a stock is outside of your normal buying parameters, and I hope you have those in place, that’s the answer. It isn’t different this time. It never is.
And the trap extends to another area of the market.
The kind of spike we saw in the first quarter of 2019 will show up in the performance data in packaged products like mutual funds and exchange-traded funds (ETFs).
One of the most common errors made by people investing in funds is to chase performance by buying into the top producer of the previous year.
There are two problems with this approach. The first is that the top-producing products of the previous year are usually the riskiest funds and ETFs. If all you look at is return, you could very well be in for a high-risk, volatile ride.
The second problem with funds following a big year in the markets stems from the reporting procedures that mutual funds use.
We’ve all seen the literature and advertisements claiming that a product is the highest-returning fund in the sector or that it beat the S&P by such and such a percentage—but that’s all useless information.
It’s useless because all of the research I’ve ever seen that concerns buying the previous year’s best-performing fund has proven it’s a guaranteed loser. Time and time again, the top performer one year is a loser the next.
It’s entirely possible this market can keep running, and the market activity of the last few weeks all but ensures a rebound at some point. How much higher it will go is the issue. I will leave that to the market guessers on the cable business networks.
My 36 years in the market tell me it’s time to be careful, focus on fundamentals, and stay within your buying parameters—and as always, turn off the TV.