Heightened Risks in the Stock Market
January 19th is National Investment Risk Day. While it may not be on every calendar, the day is an excellent opportunity for investors to review their portfolios and assess if their investments align with their individual risk tolerance.
This year, Toews Asset Management published a press release warning of "heightened risks" and stating that now "is the time to acknowledge that speculation, hype, and wishful thinking are no longer confined to the fringes of the market."
"In an age of increasing complexity, it's more important than ever to maintain a grounded and rational approach to investing. National Investment Risk Day provides a valuable reminder for investors to step back, reflect, and make informed decisions that align with their long-term financial well-being and life purpose," said Eben Burr, president of Toews Asset Management.
Are We in a Bubble?
The news release suggests several questions that stock investors should ask themselves about their current investment strategy, including:
- Will I one day look back and realize I'm investing in one of the all-time craziest investment ideas?
- If one of my investments is trending wildly higher, might it soon be trending wildly lower? What then?
- Are my risks aligned with my long-term life goals?
Although there's no mention of an AI bubble in the news release, some of those questions seem to us to hint at one.
"An investment bubble is a market cycle where asset prices rapidly inflate far beyond their intrinsic value, driven by speculation, hype, and irrational exuberance, only to crash suddenly when investors realize the disconnect from fundamentals, leading to sharp price drops," says Google AI. "Bubbles form when optimism creates a self-reinforcing cycle, with people buying assets not for their use but in hopes of selling them to someone else at an even higher price (the 'greater fool theory')."
In reality, though, one doesn't have to be a fool to get caught up in a bubble. The great physicist Sir Isaac Newton reportedly lost the equivalent of $54 million in today's money when the South Sea Bubble burst in 1720. Even one of history's greatest geniuses can get caught up in the groupthink that creates these mania-driven investment opportunities.
Is Real Estate a Better Investment?
When Campbell CPA of Yakima, WA, compared stocks and residential real estate as investment vehicles, it made several telling points. These include:
- Barriers to Entry — For most, buying a home requires a down payment and proof of the buyer's creditworthiness and financial responsibility. Anyone can buy stocks at any time with whatever relatively small amounts of cash they have on hand.
- Liquidity — Selling a home can take weeks or months, sometimes longer, depending on the market and the seller's pricing strategy. But shareholders can turn their assets into cash almost instantly.
- Risk and Volatility — Residential real estate has an excellent record for solid, reliable value growth. Downturns tend to be uncommon and brief, which makes them a problem only for those who need cash urgently. Stocks tend to be much more volatile, especially during bubbles. Sometimes, companies fail entirely, leaving investors with cents on the dollar, if anything.
Stocks tend to give better annual returns than real estate, historically in the 7%-10% range. Property tends to be a good hedge against inflation, with home prices typically rising faster when the inflation rate is elevated.
It's also important to remember that homeowners would be paying rent on their principal residences if they were tenants. And they receive rent and see the value of their asset appreciate when they own investment property.
A Diverse Portfolio
Campbell CPA sums up its advice:
-
"Real Estate: Best for investors seeking long-term stability, passive income from rent, and a tangible asset they can manage. Ideal for those with significant upfront capital and a willingness to handle property management."
"Stock Market: Best for investors seeking liquidity, higher potential returns, and a more hands-off approach. Ideal for those with smaller amounts of capital who are comfortable with market volatility."
