Guess Who Is Supporting This Stock Market Rally? My Coach!
“Zach, I talked to my financial adviser and he told me to wait for the retry. Or maybe he said redrop”
“RETEST,” was all I could mutter back as I gasped for breath.
This week, I went for a run with my long-time coach and friend, Aaron. And somehow over the course of a mostly flat 10-mile run, he picked the one spot with an 11% grade hill to start talking about the market.
It was all I could do to keep up with him. So I didn’t get much talking in.
But what I heard from my coach gave me some great insight into the way many investors are looking at this market.
And there’s one specific thing Aaron said that could make a huge difference in how you profit from this market rebound.
Investors Still Have Cash on the Sidelines
“I still have some money I want to put into the market. But now I’m afraid that I missed my chance to buy stocks at a discount. The market just keeps moving higher!”
The fear of missing out — or “FOMO” — is a very real issue for investors these days. And it’s a big part of why the stock market continues to trade higher!
Many individuals like my coach have been surprised at how fast the market has rebounded following the initial coronavirus selloff. And while they originally purposed to use that pullback as an opportunity to invest (a very smart decision), they waited just a bit too long to put their extra cash to work.
Now, there’s a big question about whether that opportunity has passed!
This FOMO isn’t just for individual investors like my coach either. Professional investors have just as much fear in many cases.
After all, professional investors are supposed to make a living by helping their clients generate better returns than the clients could make on their own.
But many of these “professionals” also have a lot of idle cash waiting to be invested. So every time the market surges higher, these investors are a bit less likely to help their clients beat the market.
This increases their own career risk. Because they could soon lose clients — or even get fired for underperformance.
FOMO Will Continue to Support the Market
I didn’t get too many words in during my run with Aaron.
But I did get the chance to ask one quick question…
“Coach, if the market DOES pull back for two or three days, what will you do?”
I’ve made my living as an investor for more than two years. And knowing what I’ve learned about the markets and human nature, I was pretty sure I knew what his response would be.
“Oh, you better believe I’ll be calling my financial advisor! We gotta get this money put to WORK!”
Yep, that’s exactly what happens when FOMO is in play.
Any pullback… even just a day or two of minor losses… will trigger the buying instincts for these investors who are waiting on the sidelines.
And as those investors scramble to get their money invested, the buying pressure will naturally halt the market’s slide and keep stocks trading higher.
So as long as there is a lot of extra cash on the sidelines and the fear of missing out, the market will be supported by new buy orders.
Don’t Time the Market… But DO Use Careful Stock Selection
Now that you understand a little more about how FOMO is propping this market up, let’s talk about how you can grow your wealth — while still carefully managing your risk.
To start with, I’m not a big fan of trying to “time the market.”
Yes, there are periods when the market has more risk, and times when bullish trends give us more opportunity.
But it is very difficult to pick the exact top or bottom of any market cycle for when to buy or sell.
The better approach is to be very thoughtful about what you invest in so that your wealth is working hard for you regardless of what the overall market is doing.
In today’s environment, there are some dangerous areas that have moved too high and pose a major risk to investors. Think of the stocks that have traded too far, too quickly.
I call some of these investments “cult stocks” because they’re owned by enthusiastic investors who would buy shares at any price. Some names that come to mind in this group include Tesla Inc. (TSLA), Amazon.com (AMZN) and Alphabet (GOOG).
Sure, these are dynamic companies with great products and exciting opportunities.
But should you really pay such expensive prices to own their stocks?
Today, many popular “cult stocks” are trading at rich levels that leave investors with a lot of risk. The stocks could pull back — even while the underlying companies continue to grow — and leave investors with big losses.
On the other end of the spectrum, there is still a lot of risk in the “beaten down” cheap stocks.
I’m getting a lot of questions about when my readers should buy cruise stocks, or energy companies, or airline shares. The truth is that even at lower prices, these beaten down stocks still hold a lot of risk and could continue to trade lower.
Instead of looking at the most popular stocks on Wall Street — or bottom fishing for the hardest-hit names — I’d suggest threading the needle and buying companies that are growing their businesses but still aren’t trading at absurd prices.
Fortunately, there are plenty to choose from!
We’ve talked a lot about the work from home stocks — companies that offer technology to help the army of workers who are now dialing in from home.
Our 5G plays are also giving investors some great opportunities as high-speed reliable networks are rolled out across America.
And some key retailers are actually thriving! Walmart (WMT) has handled this crisis well, growing its online and delivery business to better serve its customers. Meanwhile retailers who sell outdoor gear are now seeing demand as we enter the summer months and families look for ways to get out of the home without spreading coronavirus.
Today’s market continues to march higher. And as long as there is extra investment cash on the sidelines, I expect this trend to continue.
That leaves us with some great opportunities to grow your wealth. I hope you’re taking advantage of them!
Here’s to growing and protecting your wealth!