On December 5, 1996, former Federal Reserve Chairman Alan Greenspan delivered his famous “irrational exuberance” speech. He was referencing the speculation surrounding the valuation of dot.com stocks. The market eventually corrected, and the bubble did pop, but it took three years to do so. Twenty-five years later, the S&P 500 index is up 417%. If you purchased the index on the day of his speech, your average annual return has been 7%, and a $10,000 investment is worth almost $52,000!

Today, some experts are declaring we’re currently in a bubble, and the market could crash. One high profile investor said we are in a bubble with “very seldom seen levels of euphoria.” He added: “never been a great bull market that ended in this kind of bubble that did not decline by at least 50%.”[1] On CNBC this morning, another investor said: “It feels a lot like 1999 to me.”[2]

The market will eventually correct, as it has done for centuries. The S&P 500 had three major corrections this century: 2000 to 2003, 2008, and 2020. Yet, we are currently trading at all-time highs.

During the first decade of the century, US stocks generated a negative return, but international stocks, small-cap holdings, and fixed income investments produced positive returns. This year, emerging market stocks are up 8.6%, outpacing the S&P 500 by 6%. During the past six months, small-cap stocks have trounced the S&P 500 by 20%!

Diversification is the essential component to creating generational wealth. A balanced portfolio allows you to capture returns from global markets while reducing your overall risk. Your US stock exposure may fall between 20% to 40% in a diversified account, so a majority of your portfolio is elsewhere.

Rather than worrying about bubbles, focus on your goals, save your money, follow your plan, and enjoy your life.

Life is too short, too precious, too painful to waste on worldly bubbles that burst. ~ John Piper

January 21, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Data Sources: YCharts

[1] https://www.cnbc.com/2021/01/21/jeremy-grantham-says-market-is-in-a-bubble-amid-investor-euphoria.html, by Weizhen Tan, January 21, 2021

[2] https://www.cnbc.com/2021/01/21/barry-sternlicht-stock-market-frenzy-feels-like-1999-dot-com-bubble.html, by Kevin Stankiewicz, January 21, 2021