Post image for Weekend reading: Are you ready to start fearing the good times?

Good reads from around the Web.

The Americans are going nuts about a stock market bubble.

I know – it’s hard to keep up!

Only 18 months ago you couldn’t say something nice about US equities on TV without getting laughed back to the cab rank. But now everyone is bullish – and simultaneously nervous.

It’s not like that in Blighty. The FTSE 100 is ‘only’ up 11% or so in 2013, not counting dividends1. Whereas say house prices are rising and most people know it, I don’t get the sense the wider public is thinking about the stock market yet.

In contrast, the S&P 500 is nearly 28% ahead for the year. American investors, like most, have massive home bias, so they’ve seen their portfolios surge. In that sense, they are right to be wary.

There’s pretty much no correlation between one year’s returns and the next. However when prices rise, value goes down. It can’t be any other way. In that sense, I agree the US stock market is becoming less attractive – without having to consult my crystal ball.

Can you spot a stock market bubble in advance?

It’s been a good few years since people had to worry about a bubble in the overall stock market, so it might be worth brushing up on the basics.

This video interview by the every reliable Morgan Housel gives a nice bit of background:

I find this sort of thing endlessly fascinating, because I am an investing nerd.

But at the risk of sending regular readers to sleep, I also think that rather than playing poker, most people are best passively investing via a diversified portfolio, rebalancing annually, and getting on with their life.

True, that approach will guarantee you’ll never match the best performing asset in any given year. Sometimes you’ll trail quite considerably – like our model portfolio was versus UK equities as of our last update – but that’s the price of a very likely good result in the end.

The other reminder is to take short-term predictions of doom with a bag of salt – and those of rosy times forever, too, when such predictions finally do arrive.

As I wrote in November 2012 after the UK financial regulator predicted lower returns for as far as the eye can see:

Here we have the regulator rolling up to the scene of the crime not long after the worst decade for equities relative to bonds (the worst two decades, even) to warn us – wait for it – to temper our expectations.

As far as useful advice goes, this is a bit like Eva Braun showing up in London in the middle of the Blitz to warn Churchill that her boyfriend seems a bit obsessed with guns.

What was the regulator doing in 1999, when the UK stock market peaked at nearly 7,000 and shares traded on a P/E of around 30?

[…]

In my view equity returns will likely be at least average, if not higher, from here.

Depending which index you track, the US stock market has more than doubled since its 2009 lows. (And yes, one could see it might be good value back then).

Missing out on doubling your money because you listened to doomsters who said the world was ending or deflationists who said that the new normal was returns of 2% forever cost you dear. It will take many decades for cash savings to make up for those missed returns.

Get fearful as others get greedy

But all that was then, and this is now.

I’m obviously – doubled-underlined – not predicting an imminent crash. I don’t think anyone can do that, even if I thought it was wise to try – or likely.

However I think it’s safe to say the time for heroic over-allocations to US – and to a lesser extent other developed world equities – is over. Looking dumb now could plant the seeds for strong returns later.

Be diversified or be contrarian, but don’t be a clueless latecomer.

Merry Christmas!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Still to buy your turkey? ThisIsMoney has surveyed the field for the best value birds, from cheap and cheerless to quality free-range fair.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.2

Passive investing

Active investing

  • Shareholder perks and how to claim them – ThisIsMoney
  • You win by thinking everyone else is wrong – Motley Fool
  • The right way to invest in emerging markets – WSJ
  • Boca Biff: An American speculator – The Street
  • Turning $1,500 to $1m in 3 years [First signs of bull mania?]CNN
  • The most important charts for 2014 [Graphics]Business Insider

Other stuff worth reading

  • The 1% secret to getting richer – WSJ [featuring Mike]
  • Solution or symptom? Pocket’s 400-square foot flats – Guardian
  • Christmas sales: Where to bag a bargain – Telegraph
  • Did the big bank currency traders do anything wrong? – Bloomberg
  • The best investments in 2013 [Careful! Think contrarian!]Guardian
  • Fool’s Gold: End of an era – Index Universe

Book of the week: Fancy a new investing book? I did a quick review of the best of 2013, so go check it out! Or read what Bill Gates is reading.

Like these links? Subscribe to get them every week!

  1. Though small to mid-cap UK shares have done a lot better.
  2. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.”

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