Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
I knew something was up when the WhatsApp group for my old school friends began discussing Bitcoin.
This is a chat normally reserved for complaining about partners/children or sharing memes we should really have grown out of by now. Now it was concerned most of all with the percentage returns from different cryptocurrencies.
It’s not that these friends have never raised saving and investing as a subject of discussion - we’re at the age where those things are an increasing concern - but it has never been with this enthusiasm. As someone who works in the area, I’ve often been asked questions about investing, but it’s usually in the same way a plumber might be asked questions about radiators - a request for dull but necessary information. This felt like more like friends getting into a new show on Netflix.
Asking around, colleagues can provide their own evidence of this current investing craze among the previously uninterested. Not just about cryptocurrencies but individual company shares and assets like gold as well.
It’s one of the reasons that some experts are becoming nervous about stock market levels, even suggesting we could be moving into bubble territory. The old story goes that prior to the Wall Street crash in 1929 you could get share tips from the shoeshine boy. Getting cryptocurrency advice from your aunt on Facebook might be the 2021 version.
And there are more tangible signals of over-exuberance. The re-emergence of ‘special-purpose acquisition companies’ - SPACs - is also cited as a potential bubble-signal. SPACs are controversial because they collect money from investors before it’s known which companies the SPAC will acquire on their behalf, and they’ve provoked warnings from seasoned market-watchers. Warren Buffett and Charlie Munger, the duo who still head up the giant Berkshire Hathaway investment conglomerate at the age of 90 and 97 respectively, have told their investors that SPACs encourage rampant speculation and even constitute a ‘moral failing’.
At a headline level, valuations on stock markets don’t quite support the thesis that a bubble is about to burst, but anyone investing now should know that they are elevated by historical standards. That’s particularly true in the US.
A big part of the explanation of where markets are right now - and perhaps of the new craze for investing as well - is the huge sums of money that have been saved during the pandemic, and which may be about to be spent as lockdown lifts. Those lucky enough to have saved are likely to now have extra cash burning a hole in their pocket, which might explain why so many are looking to exotic investments for the first time. It also explains why the market is supporting higher-than-normal valuations, because companies should benefit if that money is spent as expected.
For long-term investors, talk of bubbles should not be cause for too much concern. If a bubble is in fact building, it is likely to still have some way to go before it bursts and those gains, even if they represent speculation in parts of the market, are still important to capture if you can. That way, if a dip does come you have benefitted from the upside as well as the down.
That, it seems to me, is far preferable to trying to time an exit and then re-entry into the market.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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