Making money feels so easy and I’m worried

sailing boat
Time to realise those capital gains…

Are we in a stock market bubble?

I am not sure about you, but I get too many investing tips from friends lately. Friends that haven’t cared much about investing before. Some ask for my opinion. Others insist I buy hot stocks like Chinese EV manufacturers.

There’s also a big boom in trading apps like Revolut, Robinhood and FreeTrade.

freetrade users
FreeTrade registers thousands of new users per day

Now there’s nothing wrong with that. I’m all up for discussing investing all day long. But I feel it’s too easy to make money these days. That’s the reason most people are now interested in joining the party. It shouldn’t be that easy.

The stock market should be like climbing a “wall of worry” not a steady rise upwards. Sure we had the -30% drop in march but we also had the quickest recovery in history! Of course, we’d prefer if risky assets like property and stocks offered 7% per year, steady. But -10% one year and +20% the next one is what we’re getting instead.

If risky assets only went up, then there wouldn’t be any risk for buying them.

The theory of investing is simple. If you want safety with bonds, you’ll get a low return. If you want high expected returns with stocks, you’re going to have to take the risk that sometimes you’ll get a lot less than you expected.

It is hard to wrap our heads around that statement but the risk of not getting great returns is what makes risky assets offer them.

Our money has historically doubled every 7-10 years when investing in property, stocks etc.

To get those rewards we have to accept the short term pain. 10% drop every couple of years, 20% every 7 years and a 50% drop every 30 years. So at least once in our lifetime.

Think about the investor who put money in 2000 and didn’t break even until 2012. That’s 12 years later! Today we invest £1000 and expect it to be £1200 end of the year. At least that’s the general feeling I get from reading online, talking to people and gauging interest & expectations.

The thing is, I don’t see any pain right now in investing.

It’s just too easy to make money. Most assets in 2020 are higher than their pre-covid levels. If you bought post-covid then you’re probably better off by a big margin. Unless you only invested in the UK where FTSE 100 still trades at -15% pre-covid levels. Or invested in lousy oil futures as I did.

See how different asset classes performed in 2020.

asset classes return 2020

I don’t see bitcoin in there, probably because it’ll skew the graph! People are making some good profits right now, and I’m happy to be on that train. I just know that it shouldn’t be that easy.

UK property defeats gravity once again

UK property, on aggregate, has exceeded expectations (at least mine!). I wouldn’t have thought that a pandemic would actually cause house prices to increase.

I mean, sure, you spend more time in your own home than at office/cafes/restaurants. So there must be a higher demand for space. It’s also one of the reasons central flats like mine and places without outside space are out of fashion. Bigger places often at a distance from the city centre are now in high demand.

Hometrack reports a +4.3% UK growth in house prices between Jan 2020-21. And here’s a picture from the Rightmove asking prices.

rightmove asking prices

But still, there’s high unemployment, people being sick, everyone tries to keep some cash on the side just in case, right?. How could UK property outperform?

Higher demand for housing is only part of the reason. I guess the property tax cuts played their role too. They favour buying now rather than later to save on stamp duty. It won’t last long. Those furlough payments put the government in more debt and it’s going to come from taxpayers eventually (who’s looking forward to March Budget?).

My proxy to property, Property partner, however, is another story. Properties trade at a big 20% discount to their “net asset value” as measured by an independent surveyor. Investors think not. They are not willing to pay the price for UK properties despite what the market says. Of course, there are fees, loss of trust in property partner etc which should not be underestimated.

I think part of the problem is that they’ve paused paying out the rent in most properties. People (including myself) don’t like that. They’ve recently started adding properties back to paying mode now. Next statement will be 31st of March 2021 where they’ll announce the next batch of properties that’ll start paying dividends again.

In case you want to speculate, here’s an interesting stat: For 15 properties announced on 18 December 2020, their share prices increased by an average of 8.5%. But the overall picture is not looking good.

Should I wait for the stock market to crash?

So if making money is too easy and assuming we’re in a bubble, then we’re due for a correction… right?

Yes! But nobody knows if when this correction will come. Should I wait before I invest my cash?

Here’s the thing.

Overall, the stock markets, property and risky assets are driven by fundamentals – productivity, population growth and innovation. I don’t want to sound like a pessimist but just because risky assets are higher it doesn’t mean that the fundamentals have improved by much. We just pay a higher price for it.

I quite liked this analogy from Roche, one of my favourite authors:

Stocks just reflect the underlying business to some degree and the firms mostly don’t care who owns their shares and the markets don’t impact the actual companies all that much. That is, a secondary market is a lot like a horse track with betting. The horses run the actual race and the bettors do stuff that reflects the value of those horses. But the bets don’t actually make the horses run faster or slower.

Cullen Roche

Therefore if we’re now paying a higher price for the same “horse” compared to last year – all things being equal – we should expect a lower return.

Now that’s far from saying we should not invest. We should ALWAYS invest 🙂 Just come with lower expectations.

And we should not wait for the stock market to crash before we invest. If something, we should make our portfolio more defensive by adding more high-quality bonds and diversify in other asset classes and across geographies.

For starters, waiting for a market correction is so mentally exhausting.

Then by the time it crashes, we might make such a high return and never meet the previous low level. Anyone waiting for a stock market crash in 2016 when the market was also overvalued is now still waiting. But now the market has to crash by more than 50% to meet the January 2016 level!! Which of course may never happen.

As if that’s not enough, young investors should actually pray for a market fall. They buy the same stocks at a much lower level.

Overall, waiting for a crash is not a great strategy for the simple mathematical reason, that the market is mostly moving upwards. Instead, having a predefined asset allocation can work wonders if you rebalance. That’s because you sell high and buy low. Automatically.

The next time I’ll write about the secret power of diversification. Everyone knows that putting your eggs in many baskets is a safety-first strategy. It’s intuitive (and boring to be honest).

But I’ll explain how our total return is higher than the sum of its parts. Mindblowing, at least to me!

How has your portfolio performed in 2020? I think a key theme in 2021 is fear of missing out (FOMO). When you see so many people around you make a quick buck (hi Tesla, BTC, GameStop) and you’re sitting on boring index funds and bonds. I certainly suffer from it and try my best not to succumb! But this was the strategy that brought me a step closer to financial independence. Why waste it now?

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11 thoughts on “Making money feels so easy and I’m worried”

  1. Thank you Michael. As always very wise article. It indeed takes some mental strength to ignore the hype of certain assets which are rocketing now and continue with your chosen strategy.

    Btw, the book that you recommended recently (The Psychology of money) resonates with this article and the mood on the market, from the perspective of having a plan, controlling emotions and behaviour.

    Thank you for the book advice too!

    Reply
  2. Hey Michael,

    Another good topic you decided to write about. I have the same feeling. It has been easy to have some decent profit since the 2008 crash if you just invested in a few index funds, S&P 500 and the rest.

    I guess what we’re seeing is a combination of people sitting on their savings plus the feeling of ‘I’ve gone through a pandemic, nothing worst than this could happen, YOLO’. If you then add retail brokers like RobinHood, Freetrade, 212 Trading that charge nothing for dealing and super easy to sign up to the mix, then the market is in for a roller coaster ride.

    GameStop, AMC and all the other gamma squeezes that recently happened, were similar to the gold fever in the US during the 19th century. A few lads found gold so everyone thought they could jump onto the money wagon. This plus the above mentioned will just change how the markets work and I assume it will become even more speculative.

    The market has always been speculative, but now more people can get into and speculate, which brings the Volatility to an entire new level. To give an example, Crypto is now what the market might be in a couple of years if this continues. BTC on the other hand will be less volatile in a couple of years, if it becomes the digital collateral of the world (if nothing drastically changes in the future that is).

    The only remedy for this is DO YOUR HOMEWORK before investing. Whether it is Crypto, Stocks, Funds, Bonds, Gold, Silver, it is essential that you understand what you are doing.

    My takeaways from everything that it is happening:
    1. Be able to filter the bad from the good analysis/research currently available.
    2. Understand in what I am investing my money.
    3. Focus on my long term goal.

    I believe that if I follow the above, it will be less likely that I get distracted with all the noise happening on the side.

    Cheers!

    Reply
    • Imagine if the markets became even more speculative, Mariano! +1 for doing research and even more importantly learning history. “It doesn’t repeat itself but it rhymes”.

      I really want to play devil’s advocate and seek signs of growth, GDP increasing and productivity gains. Reading the ‘Big ideas’ report by Cathie Wood fills me with optimism. But these things take time to show up and I think price has front-ran the fundamentals recently. I hope I’m wrong!

      Reply
  3. Thank you, Michael. It takes some strength to not to join madness of the course and stay on course with your strategy. I always wondered that can we as individual investors use our understanding of financial statements to identify winning and losing stocks? And the answer is no. One may ask, now why can’t we clever people pick winning and losing stocks by exchanging tips and reading financial statements. We may know about the PE ratio, why can’t we beat the market. The answer is that simply stated the market is too fast. The market responds to new information fast, 15 minutes or less. The hugely resourced people in Wall Street and elsewhere are constantly using supercomputers to do data analysis to find miss-priced publicly traded stocks. In order to beat them consistently, we need to merge ourselves into researcher, trader and analyst of high quality at the same time on top of our daily job and I don’t know about you but I don’t have that much time or intelligence to do all that on top of running my own business. Therefore, for me it’s easy to make long term investments in diversified portfolios, such as an index fund with a good geographical mix (developed and emerging markets), across industry sectors and different currencies as well as AAA and AA bonds as defensive assets. As you said there will be up and downs in the market but in the long run if we can beat the inflation and then hopefully gain 2-3% returns over the long run, we should be happy. Greatest wealth is peace of mind.

    Reply
    • You reminded me of the “Random walk down the wall street”. Very insightful comment. I agree with you, choosing which companies to invest in has become a tough game against all the professionals. I think timeframe is where the individual investor can have the upper hand.

      No need to give quarterly reports or care for annual performance if you think there’s value in a particular company/sector. No need to justify selection to shareholders or committees. But easier said than done though. Outperformance may never show up and given the extra effort it requires, I’ll pass!

      Reply
      • Thank you, Michael. I am with you completely. Reminds me of one of your top blog posts about opportunity cost and your dialogue with your friend in the comments section. I love my work and what I do however my pursuit of FI should not come at the expense of losing my peace of mind. It’s strange thing to say and I would not have believed myself five years ago but it’s truth in my case that since I started my FI journey and achieved a number of milestones I set for myself, I have started enjoying my work even more; I am less stressed about the job and there is lot more enjoyment and learning in day to day work as the daily grind is no longer about paying debts and worrying about expenses.

        Reply
  4. Really interesting post and yes, I have definitely encountered a few people asking about starting to invest in the past few weeks. I try to point them in a safe direction, but they don’t always take the suggestions seriously – in the end, everyone’s responsible for themselves.

    I agree with you, there’s no point in waiting to invest if you’re planning on doing it regularly, not just as a one-off. Back in 2017, a friend working in the financial industry told me that the stock market was valued too highly and investing now would be dumb. I didn’t follow his advice and started investing in 2018 – and am very glad I did so. Even professionals can’t predict what will happen next.

    Reply
    • “Even professionals can’t predict what will happen next” <- very true Kat! I think in this type of market (2020/21) it's quite hard to convince people about 5% a year investments when 5% A WEEK exist 🙂

      Reply
  5. Very well said Foxy. But for us boring index investors, it’s our job to ignore all of these worries, right? Diamond hands? 😉

    I for one had FOMO over GME, so much so that I proceeded to throw £500 down the toilet with other meme stocks. Better that than my whole portfolio though.

    I hope all is well in London and with the baby – I can’t wait until we can have a pint together again!

    Reply
    • Your Tesla shares more than covered for it my Ninja friend, right? 😉

      Ah yes…. a pint would be nice! Life is quiet here, thankfully, given what’s going on. “The life of the index-fund investor” haha. I hope your Swedish adventures are going well. Should have some stories to tell!

      Reply

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Hi! I’m Michael and I love writing about different ways to earn, save and invest our money. Coffee addict :)

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