Dan Reiter, CFP®, CPA
The investment landscape is a dynamic beast, constantly presenting new trends and opportunities. While it's natural to want to capitalize on the hottest sectors, it's crucial to navigate these trends with a strategic eye to avoid common pitfalls. Here, we'll delve into three current investment trends and the mistakes you can sidestep to make informed investment decisions that align with your financial goals.
Trend #1: Tech Titans Reign Supreme
Large US technology companies have been on a years-long winning streak, delivering eye-popping returns that have often dwarfed alternative investments. As one example, fueled by investor excitement around the potential AI boom, NVIDIA added more than $1 trillion in market value during the first quarter of this year. In fact, in one single day in January NVIDIA added $277 billion in value, roughly equivalent to the market value of every listed company in the Philippines.
The charge of large technology has been a large contributor in pushing the S&P 500 index to a record high on 22 occasions during the first quarter. However, the top ten companies by size (largely made up by technology companies) now makes up about 35% of the value of the top 500 companies despite only providing about 25% of the aggregate earnings.[1]
Mistake #1: Chasing Tech Unicorns and Neglecting Diversification
While tech giants offer undeniable growth potential, concentrating solely on a handful of companies exposes your portfolio to excessive risk. A sudden market downturn could disproportionately impact your holdings, potentially derailing your financial roadmap. To mitigate this risk, consider diversifying across sectors. This might involve including established companies in more traditional industries alongside your tech holdings. Think of your portfolio like a delicious stir-fry – a mix of ingredients creates a more balanced and flavorful dish, while relying solely on one spice can overpower the entire experience.
Moreover, international stocks (relative to U.S. stocks) and U.S. small and value stocks (relative to U.S. large and growth stocks) are now trading at historically large discounts. The price-to-earnings ratio (a common sited measure of how expensive a stock is) of international companies is 13.7.[2] By comparison, the S&P 500 index is currently at 20.9. This relative discount is the highest it has been in over twenty years.
Why are those companies outside of the largest technology companies priced significantly less? It’s about market expectations. Many areas of the market outside of technology are already trading as if we are experiencing a significant recession. One principle to investing success is to understand that, for stocks, it doesn’t matter whether future news or expectations are good or bad. It only matters whether realized outcomes are better or worse than expected. Negative, but better than expected, economic outcomes result in higher returns for stocks. The markets appear to be anticipating adverse outcomes for international and value companies, and elated outcomes for large tech.
Trend #2: CDs Make a Comeback
After years of languishing in the shadows, certificates of deposit (CDs) are finally offering competitive interest rates. This resurgence might seem like a safe haven for your cash, particularly in a volatile market, but it's not a one-size-fits-all solution.
Mistake #2: Overlooking Your Investment Goals for Fixed Income
CDs offer the allure of predictable returns. However, their returns may not keep pace with inflation in the long run, potentially eroding the purchasing power of your investment. This is especially true when compared to the potential for long-term growth offered by stocks. If you have short-term savings goals, like a down payment on a car in a year, CDs might be a suitable option. However, for long-term wealth creation, consider a diversified portfolio that includes growth-oriented assets like stocks and bonds.
Furthermore, although it might be tempting on the surface to invest in CDs for the high rates, bonds and stocks quite often outperform CDs in periods of high interest rates. In fact, in six rate hiking cycles dating back to 1984, the U.S. Aggregate Bond Index outperformed CDs in every subsequent 12-month period following peak interest rates. Stocks, using the S&P 500 Index as a proxy, outperformed CDs in five of them.
Trend #3: Market Volatility on the Rise
Geopolitical tensions and fears about stickier than expected inflation are causing increased market volatility. While this may be concerning, it's a normal part of the investment cycle, and history has shown that markets tend to recover over time. Imagine a rollercoaster – the ride might have its ups and downs, but eventually, it levels out and brings you back to the starting point.
Mistake #3: Panicking in a Volatile Market
Knee-jerk reactions can be detrimental to your investment strategy. Remember, short-term market fluctuations don't necessarily negate long-term growth potential. Unless your financial goals have undergone a significant shift, sticking to your asset allocation plan (the specific percentages of your portfolio allocated to different asset classes like stocks, bonds, and cash) is generally the best course of action. If you're unsure about your asset allocation or feel overwhelmed by market volatility, consulting a financial advisor can be a wise move. We can help you create a diversified portfolio aligned with your risk tolerance and long-term goals, ensuring you stay on track even when the market gets bumpy.
Investing for the Future
Understanding current investment trends can be valuable, but the most important investment strategy is one tailored to your individual needs and risk tolerance. There's no magic bullet or one-size-fits-all approach. Consulting a financial advisor can help you craft a diversified portfolio that aligns with your long-term goals and helps you navigate through any market storm, allowing you to invest with confidence and build a secure financial future. Remember, a successful investment journey is about building wealth over time, not chasing fleeting trends.
[1] SOURCE: JPMorgan Guide to the Markets. Data as of April 12, 2024.
[2] JPMorgan Guide to the Markets. Based upon the MSCI All Country World Ex US Index. Data as of April 12, 2024.
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