Opinion: Are stock markets looking frothy?
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There was a time when, stupidly, I insisted on taking work with me when we went on holiday, blaming the ‘curse of running your own business’ for such an imposition upon quality family time.
Naturally, I was always contactable by phone or email and, if you make yourself available, guess what? That’s right: people will get in touch, ignoring the fact – though not deliberately – that you’re trying to enjoy a break.
The arrangement couldn’t continue, not least because it was unfair on my wife and family. Our plans often had to be shelved or hastily rearranged which was no fun for anyone. So I stopped taking work away, although I made myself available via email or phone. It represented progress of sorts.
Last Tuesday, my wife and I returned from a late summer holiday in Majorca. The weather had been fabulous; we enjoyed long lunches, swimming every day; reading and probably drinking a little too much Mallorcan wine. I attribute much of this relaxation to the decision not to take my phone with me on holiday. I could heartily recommend it. The family have my wife’s number, so if we were needed, they could still get in contact while we concentrated on unwinding.
Returning to work on Wednesday was, as you can imagine, a bundle of fun. Hundreds of emails; a mountain of regular correspondence; messages to call such-and-such, but by lunchtime, I was able to sit back and appreciate that the world hadn’t fallen apart in my absence.
In fact, nothing much had changed at all. When we flew to Majorca on 13th September, the FTSE100 index closed at 7,068; when I checked at mid-afternoon last Wednesday, it was 7,067.
What has become more evident over the past few weeks is a growing sense that stock markets, including shares in several well-known, hi-tech companies, are beginning to look a little frothy. Some share prices have reached record highs, a development which has nurtured an understandable apprehension among investors.
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Apprehension and uncertainty are perfectly normal human reactions to a wide variety of circumstances. Most people tend to become slightly nervous or worried at different times: before an exam, for instance, or prior to a job interview, or going on a date.
In this respect, investing is no different to most other anxiety-inducing situations. However, our apprehensiveness can be more acute because investment requires us to commit our hard-earned cash, often for a long time, to something we believe will do well, but there’s no guarantee that it will, especially when the price of the asset we intend buying has risen inexorably.
Around 18 months ago, I touched upon investors’ apprehension prior to giving a talk on the topic to a few hundred investors and sought readers’ help in explaining why most of us become apprehensive about investing in the first place.
If, I asked, we accept that investment is an inherently uncertain process, what, specifically, causes us to be apprehensive? I listed a handful of possible reasons and invited readers to respond with details of their experience.
I wrote: “It doesn’t matter what you may have been investing in: it could be property, shares, a small business (your own or someone else’s), an ISA, a pension, or indeed anything on which you expected (or still expect) to achieve a return.” I also asked whether readers felt more comfortable investing through a financial adviser, a bank, or did they prefer to be a ‘DIY investor’ and handle everything themselves.
The response showed that most of us experience very similar fears prior to investing. Our biggest concern is losing money, followed by a nagging doubt that we have sufficient information upon which to base our investment decision. In particular, we’re often worried that we may have missed something blindingly obvious.
And then there’s risk, a crucial factor – and one to which our attitude fluctuates depending upon the type of investment we’re making. Dozens of readers noted that the older we get, the more risk-averse we become.
I suspect that the feedback supplied by readers in February 2020 would err towards even greater caution now. Does this suggest that stock markets peaked during my recent Mediterranean absence? I don’t know and fortunately, I didn’t spend any time analysing market movements.
However, it’s clear that we shouldn’t ignore how we feel about taking risk because our ability to handle possible future losses, the most dreaded investment outcome, is pivotal to determining the level of investment risk we’re prepared to take.