“History doesn’t repeat itself, but it often rhymes.”
The U.S. stock market continues to defy all logic as the S&P 500 is now up 1.12% on the year. If you slept through the first seven months of 2020 (congratulations?) you would’ve missed stocks surging 5.14% by February 20 to reach an all-time high, then plummeting to -30.83% on the year by March 23, before steadily climbing back to positive territory by the end of July. Ho-hum.
This resurgence has been predominantly fuelled by tech stocks, as companies like Tesla (up 223%), Amazon (up 69%), and Apple (up 43%), among other big names, seem to be propping up the stock market.
Our own Canadian tech darling is Shopify, whose stock run-up of 161% this year has made it the most valuable company in Canada.
It’s fair for investors to ask if we’re in another tech bubble. I mean, the last time we’ve seen such disparity between tech stocks and non-tech stocks was in the tech bubble of the late 90s. Take a look at this chart comparing PowerShares QQQ (tracking the Nasdaq 100 index) and SPDR SPY (tracking the S&P 500):
You can see the tech bubble peaking in March 2000 and then crashing hard. The Nasdaq continued to trail the S&P 500 for the next 10 years before taking off again in 2012. The results over the next eight years have been staggering:
|SPRD S&P 500 (SPY)||1.3%||11.6%||55.9%||144.1%|
Indeed, the tech-driven Nasdaq has crushed the S&P 500 – not just for the past decade but even dating back to 1999.
Tech stock proponents argue that this time is different because the companies driving the market today are actually (mostly) profitable compared to the Pets.com stocks that defined the 90s tech bubble.
To that I’d ask whether a company like Tesla, which is worth $266 billion on annual car sales of less than 300,000, is really worth $100 billion more than Toyota, the next largest car manufacturer with 11 million automobiles sold in 2019?
Fear of missing out is a real emotion when it comes to investing. I mean, who doesn’t look at the individual stock gains of Tesla or Shopify and want in on the action? I’ve even had readers ask if they should bother investing in anything but the Nasdaq since it seems to be the runaway winner for the past two decades.
It’s easy to look back and identify winning investments. It’s much more difficult to predict future winners. There’s no reason to expect that the Nasdaq will continue its massive outperformance. In fact, history suggests it’s much more likely to revert back to the mean at some point – which would make an investment in the Nasdaq now seem foolish.
That’s why diversification works. It doesn’t make for great dinner party conversation (remember dinner parties?), but a boring, low-cost, globally diversified portfolio will ensure you capture a small slice of all the winning investments while spreading your risk around so that no single stock, sector, or even country can destroy your investment returns.
I don’t know whether we’re in another tech bubble or if this is truly a new normal. All I know is that companies fall in and out of favour all the time. The vast majority of investors can’t identify the winners in advance, which is why we’re better off just owning a small slice of every company and rebalancing often.
This Week’s Recap:
Lots of buzz generated from this article on if renting is a waste of money. Bottom line: renting offers tremendous flexibility for those who might want to relocate, travel extensively, or who simply don’t want to deal with the hassles and headaches of homeownership.
Over on Young & Thrifty I explained how to transfer USD into your Questrade account.
I also took a fun look at whether you should invest in airline stocks and ETFs. Spoiler: Don’t.
Jonathan Chevreau included my thoughts on the 4% rule in his latest piece for MoneySense.
Promo of the Week:
Big banks, credit unions, and online banks continue their assault on high interest savings account rates. Most recently, Motive Financial dropped its interest rate to 1.75%.
As I’ve said many times, EQ Bank’s Savings Plus Account consistently offers an everyday high interest rate at or near the top of the market (currently 2%) with no hassles. Open an account here and fund it with $100 within 30 days and you’ll get a $20 cash bonus for free. This is a no-brainer when it comes to parking your emergency savings.
Speaking of no-brainers, this week I applied for the TD Aeroplan Visa Infinite Card. The current card promotion gets you 15,000 Aeroplan miles upon first purchase (nice!) and waives the annual fee in the first year. Time to build up my Aeroplan miles account again.
Anyone else received an ‘amazing business opportunity’ from a friend or acquaintance recently? MLMs are back in a big way, with many people looking for ways to increase their income during the pandemic and shelter in place orders.
Now MLMs have a new target audience: The #GirlBoss
They promote the message that women are failing because they aren’t working hard enough, rather than acknowledge the simple fact that “99% of sellers end up losing money when they invest in multi-level marketing.”
A few weeks ago I mentioned my rewards credit card (Capital One Aspire Travel World Elite Mastercard) was finally getting downgraded from 2% to 1.5% and removing the 10,000 annual bonus miles. The Globe and Mail’s Rob Carrick has the same card and asked his readers for recommendations – and some surprise cards emerged.
Tawcan blogger Bob Lai also has the Capital One card and decided to replace it with the HSBC World Elite Mastercard.
A great message here from Hannah (At The End Of The Day), who says, “as COVID-19 forces us to reconsider everything about daily life, something we need to talk about more is our cycle of mindless consumption.”
This post from Nick Maggiulli ties in nicely with my opening remarks on diversification: Why you don’t need alpha.
Ben Carlson from A Wealth of Common Sense says patience is a virtue no one haas time for anymore.
PWL Capital’s Ben Felix is back with another Common Sense Investing video. This one aims to explain the Fed’s “Money Printer” (QE, the Stock Market, and Inflation):
Mortgage expert Rob McLister says variable rates are a gamble that you don’t need to take right now. This makes sense when you consider there’s no upside for rates to fall further, while at the same time large variable rate discounts have dried up.
Here’s an interesting look at how the pandemic could cost you some of your CPP retirement benefits.
The head of CMHC says Covid-19 is widening the wealth gap between homeowners and renters:
“The problem is that we’re in a game of musical chairs and when the music stops playing, it’ll be young first-time homebuyers who are holding the bag.”
My Own Advisor Mark Seed explains why you should leave DSC (deferred sales charge) mutual funds for good.
Finally, Millionaire Teacher Andrew Hallam looks at why so many wealthy people drive understated cars.
Have a great weekend, everyone!