If you’re like most Americans, you have a healthy sense of skepticism. When things sound too good to be true, you get a little nervous — even cynical. Whether we’re presented with zero percent financing, one-penny Whoppers, or a free shopping spree — deep down we’re suspicious. We can’t help thinking, ‘what’s the catch’ because it is within the parameters of the ‘catch’ that good deals turn detrimental, money is lost, and what we thought was the best thing since sliced bread turns out to be the worst thing since bread-making.
As consumers, our economic sixth sense has served us well. We tend to shy away from Nigerian prince emails, shady sweepstakes, and fishy tax collection notices. We’re wary of fake discounts, bait and switch deals, and extreme markdowns.
Our instincts often get scuttled, however, when it comes to a booming stock market. The Head of Wealth Planning at Vanguard recently suggested that the recommended 60/40 stocks-to-bonds portfolio split has skewed to 75/25 for investors captivated by the upside of the sustained bull market. This dramatically elevates risk, particularly for those with a short-term retirement horizon.
Why do we do this? There are two main reasons. The first has to do with all the economic warnings that consumed the financial media for the better part of the year regarding the U.S.-China trade war. Indeed, the manufacturing woes, business uncertainty, and hits to American farmers, Chinese factories, and German auto makers were all very real. Then there was the prospect of a no-deal Brexit which threatened to shrink the U.K.’s GDP by up to 8%. And we were told the global economy was buckling under the weight of a severe and sustained manufacturing contraction. But now that we’ve arrived at a ‘Phase One’ trade deal, an orderly Brexit process, and a global economy that has seems to have regained its footing — Wall Street is melting-up and a stampede of optimism is pushing the market to recurrent highs.
This brings us to the second reason that we tend to suppress all that healthy skepticism that has steered us clear of financial danger — the so-called “fear of missing out.” It is that urgent feeling that someone is benefiting from something that we’re not participating in. It is the gnawing belief that everyone else is making more money, enjoying a greater upside, and riding higher than we are. The FOMO with respect to the current bull market, overpowers any concerns of a correction, an economic pull back, or a financial realignment. And, it is that “caution to the wind” approach to money and retirement that prompts us to make bad decisions.
Engaging in risky behavior because everyone else does, does not make for a sound financial plan. It wasn’t all that long ago that countless consumers followed the crowd into the ‘no money down,’ subprime traps that pushed their homes underwater. Or, signed up for credit cards with fleeting introductory rates, or used their houses as piggy banks with hefty cash-out re-fi’s that dramatically inflated their mortgage debt.
Just as we do when we buy anything — when we invest, particularly in equities, we have to tap into our innate sense of cynicism and ask the hard questions. What if monetary policy can’t be normalized? What if there is a corporate debt-driven recession? What if more countries exit the EU? What if the global economy continues to wobble?
So, whether it’s a BOGO, FOMO or Door Buster Deal that lures you to the Wall Street risk party, make yourself aware of the exits. This is not about having the right coupon at the right time. It’s about having the right money in the right place — right now. Amid the dark pools and the unicorns, the fat tails and the fallen angels — we must again summon our inner skeptic. Is Wall Street riding new highs because of market fundamentals or because the world just dodged another trade war bullet?
Those that come upon the real answer, will likely leave the party as quickly and as quietly as possible.