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We're now officially through the first quarter, but I for one am not breathing a sigh of relief.
During Q1, the Dow Jones Industrial Average gained 4.6% to close at 20,663.22, its sixth straight quarterly gain. The S&P 500 jumped 5.5% to 2,362.72 and the Nasdaq Composite Index, powered by tech giants, climbed a robust 9.8% to 5,911.74, its best quarterly performance since 2013.
But this market isn't driven by individual stocks. Far from it.
Right now, most investors are following a painfully ignorant investing "strategy" that will leave them the most exposed and least hedged at the moment when stocks are most overvalued and vulnerable to a correction.
The ETF Bubble Means Most Investors Don't Know What They Own
This quarter's bull market has been largely bolstered by ETFs and computer trading, which begs the question of what investors are really thinking.
There is now $2.8 trillion invested in US ETFs and record amounts of capital are being added to this pile of money every month. In the first two months of the year, investors bought another $124 billion of ETF shares. This means that investors don't have to buy individual stocks because ETFs do the work for them. This means they know absolutely nothing about what they own.
But rather than their ignorance giving them pause, it is emboldening them and leading them to borrow record levels of margin debt (margin debt hit a record $528.2 billion in February) and express record levels of bullishness in various surveys at precisely the moment in time when they know the least about their investments! For the moment, ignorance is bliss, but ignorance always ends in tears and this time will be no different. When that happens, these park-their-brains-at-the-door investors will be screaming at their wealth managers and investment advisers and asking them to explain how they could possibly be losing money in the stock market since that isn't supposed to happen in a world where central banks are supposed to bail everybody out. But even their wealth managers and investment advisers don't know anything about what's inside these ETFs because the whole point of investing in these vehicles is to abdicate any responsibility to do fundamental research or think independently. Instead, ETFs are the perfect vehicle for group thinkers in a world of fake news. (I've discussed the ETF phenomenon at greater length here.)
The ETF bubble will end badly and when it does, investors will have only themselves to blame for being too lazy to do the hard work of investing for themselves. You sometimes have to wonder if they go out of their way to act like fools.
For those of us who prefer less ignorance and more profit, here's what I suggest.
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Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.