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Does the stock market bubble burst in 2021?

January 07, 2021 Sign up

Hope this first week of the new year is going well for you!  In today's Gist, we'll cover three money topics you've asked about:

  • Warnings of an epic investing bubble. What do you do?

  • How do you learn more about investing in alternative assets? We're talking about classic cars, social media accounts, farmland, newsletters, and more!

  • How do you figure out what "extras" are worth buying?


How should you deal with a major market downturn?

RIP Grumpy Cat

Have you heard of Jeremy Grantham, a legendary investor and founder of investment firm GMO?  Well, he's warning us of an "epic bubble" in his article, Waiting for the Last Dance

He goes on to say that the decade long bubble has fully matured and that "extreme overvaluation, explosive price increases, and hysterically speculative investor behavior will be recorded as one of the great bubbles of financial history..." So, OK. Even if he's right, what should you do about this? 

If you're already invested, stay invested.

Selling on fear and panic won't get you where you want or need to be!  Market timing doesn't work most of the time.

As Coach Bradley put it, if you invested $10K in the S&P 500 from Jan 1, 1999 to Dec 31, 2018, your investment would be worth $29,845 if you stayed fully invested.  If you missed the top 10 days of performance over this 20 year period, your account would be worth $14,979.  If you missed the top 30 trading days over this period, your account would be worth $6,316.  

Coach Ilene also shares that radical moves in portfolios almost always end up being a mistake.  It's better to make small tweaks, prepare for a potential drop (which usually corrects decently) and be ready for new opportunities. As businesses change, we can then begin to identify those companies that will be better poised to grow. 

The market is like a roller coaster...

If you buckle up and ride it out, you will most likely end up fine.  But if you try to hop in or out of it while it's twisting and turning... well, good luck to you!

If you're uncertain about the future but want to keep investing, go with Coach Vineet's suggestion to dollar-cost average.  That means to contribute a set amount of money on a regular (e.g., weekly, monthly) basis into your portfolio, regardless of market conditions.  It's a simple way to make consistent contributions into an investment account without trying to predict when the market's going up or down.

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How do you learn about the latest in alternative assets?

There are a million newsletters about stocks and venture capital.  Stefan Von Imhof's newsletter Alternative Assets is about the world of investment options that don't get talked about as much — with a focus on digital assets, websites, and micro private equity. 

Besides the newsletter, Stefan also runs a podcast and data analytics service for alternative investments.

Every week, Stefan dives into a different alternative asset.  Past issues include investing in classic cars, farmlandbillboards, even newsletters themselves

There’s a world of opportunity out there. Explore it


How do you figure out what "extras" are worth buying?

As we all start 2021 with fresh ideas on how to set and meet financial goals, don't forget to factor in expenses! Especially those "extras" or nice-to-haves.  So then how do you figure out what "extras" are really worth buying? 

Here are a few practical tips from the Finny community:

  • Identify the problem. What problem are you trying to solve by purchasing?  

  • Pinpoint its utility. Is it useful?  Do you need it?  And how often do you think you will use it? 

  • Sleep on it. Give it a day before deciding.  Impulse purchases often come with regret.

  • Apply the Rule of 72. Coach Ilene says this rule can be used to project what a purchase amount would be worth in X # of years if you invested the money instead.  Then think hard whether to spend the money or invest it.  For example, $250 today might be worth $4,000 in your retirement!  How?  Divide the number 72 by the assumed investment appreciation rate (say 8%) to get to the # of years for your asset to double in value (9 years).  Assuming you're 30 years old, a $250 investment will be worth give-or-take $4,000 in retirement.  So would you rather make the purchase today or invest the money for your own future?

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