Gil’s Musings

Worried About a Market Bubble?

Investors are increasingly worried that a bubble is coming in both stocks and bonds. That’s the main findings of a recent fund manager survey by Bank of America Merrill Lynch.

The number of investors who think the stock market is overvalued reached its highest in point 15 years. At the same time, a record number – 84% – think the bond market is also overvalued.

Investors, in other words, are getting antsy. The stock market’s steady rise and ongoing worries about when the Federal Reserve will raise interest rates is beginning to chip away at investor confidence.

So what should a savvy investor do? Well, the best thing may be nothing.

If investors are savvy, then they already have developed a strategy that will help them achieve their financial goals, one that is designed to weather both the ups and downs of the market. While others may be getting antsy, this is the time that savvy investors puts their strategy to the test.

As I’ve written before, the hand-wringing over rising interest rates is largely overblown, and there’s still value to be found in U.S. stocks.

More important, changing your investment strategy based on fears of a market bubble is likely to cost you more than it saves you. Warren Buffett, who knows a thing or two about investing, once said that more money has been lost in the pursuit of avoiding loss than the risk of actual loss ever portended.

In other words, investors are better off buying stocks and keeping their head down. As I’ve written before, the more you sell, the less likely you are to come out ahead.

Individual stocks are more difficult to own because we always harbor a little bit of fear that a company will become the next Enron.

The best way to avoid this fear, of course, is buying funds that hold baskets of stocks. There’s safety in numbers, but you also must be wary of fees and other hidden costs that can add up.

Investors who are getting nervous about valuations these days may be thinking a bit too hard. My largest position is the Vanguard Total Stock Market ETF. I actually have more money invested in it than the current value of my home. So if you need a testimonial about confidence or risk, there it is. It isn’t a particularly glamorous or exotic investment. In fact, it’s downright mundane, but that’s the point. The best investing strategy for long-term success is to buy something simple like an index fund tied to overall market performance, contribute to it regularly, and never stop. And never sell.

Do that faithfully and you won’t have to worry about bubbles.

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