Beware the Share Market Hype
Share markets around the world rallied in November on the back of a Biden US election victory plus vaccine optimism. In the US alone, $90bn flowed into equity funds in just three weeks!
I am reading articles stating that 2021 will be a great year in equities with some analysts predicting double-digit returns in 2021. These analysts suggest the environment has set the most attractive scene for equities since the Global Financial Crisis. I would argue the significant gains since the March 2020 lows suggest the most attractive period has already passed.
Don’t get me wrong; I do think that equity markets will gain more ground over the next two quarters. In my view, the outcome of the recent US elections and the news that a COVID-19 vaccine being available earlier than previously anticipated has improved the short-term outcome for the economy and the share market.
The two key risks in my view are:
- that the pandemic takes another turn for the worse over the northern hemisphere winter and a vaccine still takes a long time to develop, produce, and distribute; and
- that policymakers withdraw support prematurely, undermining the economic recovery and the prospects for risky assets.
It is not hard to see why the above have fuelled November’s surge. A compelling new story, clear light at the end of the tunnel, policy support and a wall of money. Everyone would be tempted to join in the fun!
One lesson I have learnt from many years as a financial planner is that the time to be careful is when everyone else has thrown caution to the wind. Most clients say they are happy to take a risk until it is too late, and they have lost money. Now is the time for a disciplined approach to investing using a diversified, uncorrelated investment approach.
Through this approach, if the market goes up and everyone makes money, that’s great, you will too. But what if it doesn’t? What if it’s flat or even goes down as some of the outlined risks eventuate? That is when diversification will matter to help protect your wealth.