Investing With Immunity

Dear Rich Lifer,

American zeal for the stock market is at an all-time high, with individual investors owning more stock than ever before. 

In April, stockholdings among U.S. households increased to 41% of their total financial assets — the highest increase on record, according to JPMorgan Chase & Co. and Federal Reserve data going back to 1952. 

Individual investors are borrowing to increase their bets and are capitalizing on dips in the markets by adding more stock to their portfolios. 

This burst of enthusiasm comes as market volatility has been decreasing. Additionally, the S&P 500 has hit 25 records this year due to a historic earnings season fueled by the swift economic revival during the ongoing pandemic recovery. 

Combine this with stimulus checks that have boosted household income, and you have the perfect combination of factors for more individuals to get involved in the stock market. 

Today we will explore this new trend and reveal how it is affecting the market overall.

Read on…

“Generation Investor”

Millions of new brokerage accounts were created in the past year during the coronavirus pandemic, and many investors who were just beginning to try their luck at stock or options trading have stuck around for the long haul. 

A survey from Charles Schwab analyzed 500 investors and revealed that 15% of them began playing the market in 2020. This trading boom has only continued into 2021, with JMP Securities estimating that more than 7.8 million new retail clients entered the market in January and February of this year. 

Schwab is calling this new wave of investors “Generation Investor.”  

Jonathan Craig, Charles Schwab senior executive vice president and head of investor services, describes Generation Investor as “the large number of people who are bound together not by their birth years but by when they got started in their investing journey — who are now on a path to ownership and reaching their financial goals.”

The new investors are not just young people. Schwab found that the median age of these investors is 35. More than 50% of Generation Investor are millennials, 22% are Gen X, 16% are Gen Z and 11% are baby boomers.

Buy, Don’t Sell 

Many investors bet on the market through passive investments and have learned that it’s better to hang on to stock holdings, even in times of market turmoil, than to ditch them.

Dev Kantesaria, a managing partner at Valley Forge Capital Management, advises, “The real learning lesson over the last decade is you just put your head down, you don’t try to time the market, you take advantage of weakness.” 

And this lesson has clearly been a takeaway for many investors during the pandemic. 

In fact, data from Vanda Research shows that individual investors tend to buy more shares when the S&P 500 is down 1% on the day than when it is up by the same amount. Research also revealed that their resolve to buy during selloffs has strengthened during the pandemic. 

Investor Confidence Boost

Financial advisors and money managers report that their clients have grown more comfortable holding stocks because of the powerful rally in the markets that has been witnessed over the past year. 

Recent impressive earnings reports from giant companies like Alphabet Inc. and Facebook Inc. have also contributed to a steadily rising market, drawing in even more investors. 

David Sadkin, a partner at Bel Air Investment Advisors who oversees $4.6 billion for wealthy clients, said the share of their money sitting in the stock market has increased to about 65% from roughly 45% last year. At the same time, investments in bonds have decreased or have been reinvested into stocks. 

Bonds usually add a level of security to an investment portfolio and are considered safe and conservative as far as investments go. Therefore, Mr. Sadkin explains the current shift away from bonds by stating, “In order to achieve our clients’ goals, we need to take on more risk. We intend to continue to reallocate into risk assets while interest rates stay this low.”

It seems like aggressive investing has become the norm. In fact, a survey by the American Association of Individual Investors showed that investors’ allocations to the stock market hit around a three-year high of 70% in March.

Additionally, Financial Industry Regulatory Authority figures show that margin debt — money investors borrow to buy securities — stood at a record $814 billion. This number is up 49% from one year earlier and is the fastest annual increase since 2007. 

The “Everything Rally”

This stock market rally that has been boosted by investors is being called the “everything rally.” 

However, the rising prices on the markets — for everything from lumber prices to bitcoin — are beginning to stir up worry about a market bubble. Some analysts believe the euphoria currently surrounding the stock market is a warning sign.

Nikolaos Panigirtzoglou, a managing director at JPMorgan, warned:

Retail investors have made a lot of money on many things including equities over the past year. At some point, given how high their equity allocation is, the risk is they decide to get out and take profits. That is effectively what happened before in 2000.

However, bubbles are defined by more than high valuations. Analysts and investors remind us that bubbles are also fed by investors’ willingness to believe stocks can only go up, ignoring the realistic values of the companies they are investing in. 

Frothy markets are capable of running much longer than skeptics believe, like in Japan, where stocks reached a trailing price/earnings ratio of as high as 60 times in 1989 before beginning their collapse and subsequent decades-long period of stagnation.

Right now, the S&P 500 currently trades at a price/earnings ratio of almost 40. However, dozens of stocks in the S&P 500 trade above the index’s P/E ratio, such as Tesla. 

Others think the market is likely to continue to increase due to the support from policy makers, especially the Federal Reserve, which has shown no signs of tightening its monetary policies enacted at the beginning of the pandemic, including lowering interest rates to near zero and increasing bond buying. 

 Byron Wien, vice chairman of Blackstone’s private wealth solutions group, explains the whole current stock phenomenon well by noting, “People feel they’re investing with immunity.”

How long that immunity will last is anyone’s guess…

To a Richer Life,

The Rich Life Roadmap Team 

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