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Market Bubbles Have a Pattern… Can You See It Now?

May 11, 2017

As advisors, we all read and listen to various pundits and market “experts” prognosticating on the markets: where they are, where they are going, the risks and the opportunities. I venture to guess very few, if any, of these experts are, or have been, financial advisors.

As advisors, we are in a unique position to sit across from and alongside our clients as we advise and guide them to our best ability so they may achieve their financial goals

The relationship we share with each of our clients is very powerful and deeply personal – to them and to us. We have tremendous responsibility as their trusted advisors and it is an honor to serve in that capacity.

So when markets are challenging, we are the ones who experience their fear and anxiety. We are the ones who are called upon to help them make the best decisions and navigate volatility and panic in the marketplace. The expert commentators featured on financial news networks probably don’t share that same sense of responsibility towards the very real people and families that are in the throes of either fear or greed (or both) in the markets.

I have learned, after more than 34 years as an advisor, that the psychology of bubbles follows a pattern. I remember the dot-com rise in the late 1990’s, when investors thought there was nowhere for the tech sector to go but up. Clients wanted to dump their bonds and their dividend-paying value stocks and ride the wave of the dot-com boom.

No matter that many of these companies had no earnings. I remember how frustrating and difficult that time was for me, my team and my clients. I could not, as a trusted advisor, allow my clients to abandon all sense of prudency and jump on the “greed train.” I wrote a letter and mailed it to all of my clients. I let them know that I could not and would not speculate in the dot-com mania. I explained that if they wanted to participate, all orders would be clearly marked as unsolicited and I could not take responsibility. I lost a few clients. The technology sector continued to rise. I remember how stressful this time was for me. Was I doing the right thing? Was this a new paradigm? I started to feel foolish as markets continued to rise.

But I stuck to my investment philosophy and continued to do what I thought was in the best interest of my clients.

When the bubble burst, our bonds and dividend-paying stocks became instrumental in our survival. The diversification worked.

Fast forward to 2005-2007 when clients asked if they should take money out of the market or open up a home equity line and use the funds to invest in real estate. My own father, in his mid-80’s at the time and of very modest means, wanted to mortgage his “paid for” home to buy real estate. The greed and mania were reminiscent of the late 90’s.

I begged my Dad not to invest in real estate – he could not afford to speculate. As real estate markets continued to rise to incredible levels, I once again went through the emotions of self-doubt and wondering if I had made a mistake. When the bubble burst and the global financial markets were in chaos, no one came out completely unscathed. We survived and our clients survived and recovered.

Today, I have those same feelings. Markets continue to rise. Valuations are high. Although clients do not necessarily feel giddy about the future, there is a sense that nothing seems to affect the upward bias in the U.S. equity markets.

Yet, we are cautious. We are prudent. We, at times, feel foolish that we don’t have more in the market.

I have had that feeling before.

When you look into the eyes of the families you serve, knowing that it is your job to guide them and to exercise logic and common sense in an increasingly reactive and volatile world, following the herd is not an option. We must prepare for bad times during the good times and sometimes that can feel foolish, but in the end, we trust our knowledge and our experience.