Everyone is a genius in a rising market

And sure enough, with U.S. stock markets trebling in value1 since the lows of March 9, 2009 we seem to have a plethora of geniuses at the moment. Investing is easy and cheap to do. All you need is a smartphone and an app.

We will continue to see many similar comments espoused by the popular press and many, far too many, will make the often fatal assumption that indexes always go up. Many “expert” writers and bloggers conveniently forget (financial amnesia?) that the NASDAQ2 Index – America’s much loved tech index is just about to break even – some 15 years after its highs!

We also cannot forget the Japan NIKKEI3 index which is still more than 50% below its peak of 1990.

Put another way, in 25 years the Japan index is still trading at half its 1990 value.

And just now the U.K’s benchmark index, FTSE4 has reached its high of 15 years ago.

The Great Rotation back to stocks (absent in early 2014) has taken hold with a vengeance and despite the forgotten lessons of Japan, the UK and NASDAQ, index passive-ists has become today’s new religion.

The passive-ist argument is disarmingly simple: Since all indexes go up in a straight line, you just buy the cheapest one and because profits are certain, simply dump your advisor and you surely will be on the path to guaranteed riches.

It is my contention that investors who use index investments exclusively and buy the cheapest things (because they are cheap) will at some point have their heads handed back to them.

Money will flow out faster than it came in, as declines accelerate during the next apocalypse dejour whatever it might be and DIY (do-it-yourself) investors will get out near the bottom as history repeats itself – again.

I see way too much index fervour (fever?) especially with respect to U.S. indexes. In my view, indexing at record highs is not a medium risk strategy. It is a high risk strategy.

My timing will of course, be 100% wrong. Markets can be overvalued or undervalued for long periods of time.

But they do correct.


1 U.S. S&P 500 Index: http://www.advisorperspectives.com/dshort/charts/markets/SPX-snapshot.html?SPX-snapshot.png

2 U.S. NASDAQ Index: http://www.marketwatch.com/investing/index/COMP/charts?symb=COMP&countrycode=US&time=20&startdate=1%2F4%2F1999&enddate=2%2F26%2F2015&freq=1&compidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013

3Japan NIKKEI 225 Index: http://www.marketwatch.com/investing/index/nik/charts?symb=JP%3ANIK&countrycode=JP&time=20&startdate=1%2F4%2F1999&enddate=2%2F20%2F2015&freq=1&compidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013

4 U.K. FTSE 100 Index: http://www.marketwatch.com/investing/index/UKX/charts?symb=UK%3AUKX&countrycode=UK&time=20&startdate=1%2F4%2F1999&enddate=2%2F26%2F2015&freq=1&compidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013


The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. 

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