Can you really trust the markets?

Or will they let you down - from time to time?

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So, can you really trust the markets?

This is one of the most important questions for investors.

So, it’s worth taking some time to explore.

The quick answer is ‘NO’

Of course, you can’t trust the markets to rise steadily over time without some big crashes along the way.

You might be lucky – and you might not.

But this is not quite what you’ll hear from one, large and noisy tribe of self-appointed ‘experts’ on market behaviour.

This tribe will tell you, very firmly, that you can, always, trust the markets to deliver the goods over the medium term.

So, I want to tell you about this tribe. And then you can decide if their ‘beliefs’ are useful to you?

Really … a tribe?

Oh yes, this tribe has thousands of members all over the world including quite a few (but certainly not all) financial advisers.

And it also includes some of the most popular DIY ‘investment’ bloggers on the internet today.

So, perhaps you already follow this tribe … and that’s fine if you do. 

Some of these peeps have a lot of good ideas – and I’m always open to those … just as long as they’re logically argued and politely presented 🙂

Unfortunately, rather like some religions, this tribe often meets in ‘closed’ groups so that its members can reinforce their beliefs

And, perhaps not surprisingly, people like me are not very welcome in those groups.

That said, I do join them from time to time, but really just for a bit of fun … and once I’m spotted (as a non-believer) I’m quickly shown the door 😉

And that’s one reason I started this site!

You see, ‘challenge’ is seen as ‘dissent’ in any group of fanatics.

And that thought is worth pondering on!

But, as I’ve said, you’re very welcome to challenge my ideas here … because this site is about a constant search for better and better ideas.

All I ask, if you disagree with a point I make, is that you keep your comments on point and polite.


The market fanatics

Now, to simplify this Insight I’ll call this tribe the ‘market fanatics’ (or the “MFs” for short)

And that’s because all MFs believe that the markets know best. And are always and everywhere ‘perfectly’ valued.

So, that means that you never need to worry about stock market valuations provided that you …

“Just get in those markets  – and stay there for the long term”

Perhaps you’ve heard that somewhere before? 😉

The other characteristic shared by a lot of MFs is that they’re really passionate about investing in index-tracking funds.

And they might very well suggest that you buy into all the world stock markets … in the proportions that those markets make of world markets.

Which, in plain English means that if the US stock market represents c. 55% of world stock market capitalisation …

… they might very well suggest that you hold c.55% of your Stock market money in the US companies.

I see. So, is this a problem?

Well, it could be.

You see, taking that approach to investing would (on several occasions in the past) have exposed your money to some very nasty risks.

What occasions am I thinking about?

Well, try 2006-07 and 1998-2000 and the late 1980s, for starters … especially for the many people caught up in the Japanese bubble.

So, if an MF tells you (and quite a few do) that ‘crises only come once in a generation’

… you might like to ask them what happened to stock markets immediately after those times.

And you can find more on how to test your investment adviser here

In 1989 for example, if you’d followed the MF approach, you’d have put a large share of your money into the Japanese Stockmarket … which then fell by around seventy five per cent over the next 23 years! See here

Nikkei since 1985

Of course, an MF is unlikely to tell you this stuff.

Instead, they’re likely to give you a quote or two from Mr Warren Buffet to support their ‘belief’ that markets can be trusted at all times.

For the novice investor, Warren Buffet, is generally accepted to be one of the most successful investors of all time.

So, the Buffet quote you’ll be shown (and there are many) will be the one that seems to support the idea that index tracking funds are an investing panacea.

And before I challenge that point, let me be clear …

Yes, it’s right to say that Mr Buffet is a big fan of the ‘low cost’ aspect of index tracking funds … as am I.

Indeed, what’s not to like about good value for money … if you want to track an index? 🙂

However, if you read more about Mr Buffet’s ideas, you’ll also find that he’s aware, unlike many MFs, that markets are NOT always fairly valued.

So, take a look at this chart – from my friends at Adviser Perspectives

Buffet’s favourite value indicator

Buffet indicator

Now, based on this, I suspect Mr Buffet, might now think that the ‘value’ available on US shares is now very poor.

And the other stock KEY stock market indicator that we keep an eye on  – on this site – would seem to support that view.

It does seem that the USA stockmarket has been overpriced for some time.

More on that here

So perhaps we need to think twice before following an MF’s advice to put (or hold) ‘too much’ of our money in the US Stock Market right now eh?

Who cares about this?

Well, to answer that, let’s think about two types of investor.

1. Regular investors in stock market funds.

Regular savers into stock market-based funds, who have a long timescale for their savings (like younger people saving for retirement) have little to worry about w.r.t. market valuations …

provided that the market has some realistic prospect of trending upwards over the long term.

And it’s fair to say that most developed world stock markets do perform well (and a lot better than cash deposits) over the long-term.

That said, let’s not forget the Japanese market experience from 1989 onwards … when market overvaluation was so extreme and so slow in correcting that the returns (even for regular savers) were very poor for a very long time.

More typically, massively overpriced markets correct quickly, with a crash. And that’s great news for longer-term regular investors, starting out on their investing journey …


… because they buy more shares (or units) in their investment funds for each dollar (or pound) they put in, as prices fall.

It’s the same with house prices – if you’ve not bought one yet – you want prices to fall … right?

So, for example, from January 2000 to January 2015 regular Stock market investors made great returns on their money, despite the market being broadly flat over that time.

The two big falls (each of around 50%) in major stock markets during that time, gave the regular investor some really great bargains.

2. Lump sum investors (& those invested)

Now the truth is that big market falls are a lot riskier for these people. So, if that’s you, please take more care.

And that’s especially important if you’re drawing down – or about to draw down – heavily on those funds in order to take an income.

Your wealth can quickly be wiped out if your funds fall steeply in value at these points in time.

In short …

Big falls in stock markets can be your friend as a regular investor … but become your enemy as you build up your funds. And that’s typically as you get older.

So, along with adviser, if you use one – and I’d suggest that most people do (just beware the MFs) …

… you should aim for a mix of ‘risky’ and ‘less risky’ assets in your investment portfolio to match both your ‘appetite’ for investment risk AND your ‘capacity’ for risk too.

More on that here

But what if you save and invest?

Of course, most investors will invest regularly and already have some money invested.

And if you sit in between these two extremes then at various times you will want to:

  1. Protect some of your existing funds – especially if you’ll need access to those funds in the near term whilst
  2. Accepting more risk (in the hope of more reward) on your longer-term funds and your ongoing regular investments.

So, a big investment risk challenge is to align your investments to your various financial life goals.

Money Life Map

All investors are active

Building an investment portfolio which offers prospects of good returns and has some protection from big market crashes is very difficult.

And this is especially true right now when many of the safer asset funds are not looking very safe at all.

There are, unfortunately like most things in economics and finance, many schools of thought on how to approach this challenge … and I’ve only scratched the surface here.

But I hope this might help you to question anyone with a ‘fanatical’ trust in markets … and I’d caution you against joining MFs in their ‘belief’ that most active fund managers are bad people. They are not.

The point to understand about ‘active fund management’ is that every investor is an active investor.

Your first active decision is whether to manage your own money or to hand the job over to someone else.

And if you decide to get help with your money, you then need to make an active decision on the type of wealth manager to use.

Do you want an adviser who will :

  1. Place your money with leading investment managers (with an aim of mitigating some risks by taking account of market valuations) or
  2. Create a ‘Mix’ of some Index Trackers (in shares and bonds) and take no account of market valuations.

Or something in between?

You must decide which route is better for you personally.

Generally speaking, I’d encourage to you get competent help with your financial, investment and pension planning.

And to ask hard questions to test the knowledge, skills and value for money of your adviser before you commit to using them.

There are some wonderful financial advisers out there … but sadly there will always be some who will charge too much and /or give very unhelpful advice.

So, take good care out there and

Thanks for dropping in


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