Late 2020 and so far in early January 2021, the number of market analysts and financial advisors who believe we are in a bubble has increased. A bubble occurs when investors begin over-speculating and over-valuing assets to the point where the biggest driver of price increases is the fact that prices have already increased tremendously.
Investors in these markets may be aware that prices seem extraordinarily high, but experience high enough levels of FOMO (fear of missing out) that they decide to invest anyway.
The problem with thinking that we are in a bubble, even if it is true. Is that it encourages investors to wait for the perfect moment to put their money in the market. This is called “timing the market” and it is nearly always a bad idea, or at least, a very risky idea.
Of course, I would not encourage an investor to put all of their money in the stock market today with the current market conditions. An investor should begin dollar cost averaging, that way when- or if- the market does decline they could put more money in the market. Dollar cost averaging can also reduce stress and teach an investor about market volatility.
If you are waiting for a monumental crash of the stock market before you invest ANY of your money, then you could be waiting years or even decades. There are other ways that bubbles can be relieved besides crashing extravagantly. They could slowly fizzle out, or be affected by the money supply, or many investors could be wrong and we may not be in a bubble at all.
There is a great quote that John Maynard Keynes is rumored to have said, “The market can remain irrational longer than you can remain solvent”. This means that markets can stay in a bubble for longer than you can predict, and it is very possible to lose enough money waiting for a market crash to make the return when it does negligible.
You should invest in a way that makes you comfortable and increases your long-term odds of success. All investors lose value, but the money is not truly lost until you sell the asset. And, as we know from historical stock prices, the general market has always recovered.
I think we are in a bubble, but I also think that market predictions are right as often as they are wrong. Pessimistic market predictions in particular tend to be more wrong than right. So I am still investing money and dollar cost averaging, although at a slower rate.
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