That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. People who buy securities for the purpose of re-selling, rather than holding, bid prices up, based not on fundamental valuation but on the thought that it will become more popular.
Stock markets aren't the same as the economy as a whole, but stock market bubbles boost the economy when irrational exuberance increases the total apparent wealth. And when enough people decide that it's peaking, it does, and the same process works in reverse, causing a recession.
So yeah, it's a self-fulfilling prophecy, but that doesn't mean there's a way to avoid it. The market prices are already high; they must eventually revert to something closer to a true valuation. But since that time is determined almost entirely by consensus, nobody knows when. Indicators like this one are a sign that people are changing their minds, but it's been that way for a while. They're just indicators of public perception, and the public takes them into account, too.
I don't think this is strictly true, though. As you said, "Stock markets aren't the same as the economy as a whole". The financial part of our current economy seems to have an outsized perception/participation rate. If the rules of the game changed to reduce the appeal of financial activity, there might be less second- and third-order "betting on bets (on bets)" and less of the self-fulfilling prophecy you're talking about.
This may not be feasible in the world we live in: it would take a very different political climate, and of course there would be knock-on effects for society. But imagine that we turned our income tax rationale inside-out and policy shifted so that wages had very very low rates and investment income very high rates. Note I'm not advocating this, just offering it as a "what if".
> That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up.
I'm really curious how the index funds will behave in the upcoming recession, afaik that was one of their main mantras and selling points, so to speak, i.e. that the market only goes up (or a certain part of the market, the most important part of the market) and that you'd be a fool not riding the wave by investing in said index funds which were in turn investing in that part of the market "assured" to always go up.
In other words, what will people do when they'll see their index funds go down 10 or 20% yoy? Will they take their money out of said index funds? Will they wait for the next uptick?
Index funds will do exactly as well as the aggregate of the individual stocks that they track (whether equities, bonds, treasuries, real estate, metals or something else.)
The selling point is that investing (as opposed to trading) is a long-term method of increasing wealth. And, historically over any reasonably long period of time, broad index funds grow (between dividends and selling price) more than inflation, and do so without requiring the individual investor to "bet right" on individual companies, or to time when they buy and sell.
Of course, some people panic when index funds see massive drops (which are often much worse than 20%) and sell when the price is much lower. They lock in the losses thinking they can perfectly time the "low point" and buy back in at just the right moment. (A few are right. Most are not!)
Investing does include personal tolerances for risk, an ability to be patient, etc so you have to figure that out for yourself. But the most successful investment plans are a combination of diversification and sticking to your plan through the bad times as well as the good.
You shouldn't be reacting to the market (as a long-term investor.) You should have a solid plan in place. If you have a firm asset allocation of 80% stocks and 20% bonds with a line item in your investment policy statement that says "Re-balance when there is 5% or greater drift" then you wait until you cross that drift threshold, sell and buy what you need to get back to your target asset allocation, and you go on with your daily life.
You can beat the market if you take more risk and it works out for you.
I’m beating the market right now, I’m up 33% this year still in my portfolio even with all the bullshit that’s happened. And recently, I’ve dumped all the extra margin I was holding so now I’m holding 100% equity in my stocks and paying no interest.
Beating this market since 2010. That’s why my net worth is well above a million with little to no effort.
I took a risk yes, but it’s not greater than the risk of building a startup and trying to make it successful which people seem to have no problem doing around here.
But seriously, there are always outliers who got lucky. For every one that gambles on a dark horse, there are 1000 who lost that way. And the winner is always, always certain that they knew what they were doing and luck wasn't involved.
Frankly, with the market we’ve had the last 10 years practically anyone can beat the market as long as they invest in decent tech stocks. That’s why there’s so many millionaires running around here these days.
> I took a risk yes, but it’s not greater than the risk of building a startup and trying to make it successful which people seem to have no problem doing around here.
Is that true? It sounds like you took on debt to finance your trading. Do most startup founders personally take on debt?
Pulling out of an index fund after you've been hit by a market crash is a really bad strategy. Either pull out now and put your money in a savings account, or stay in the index fund for the long run.
Stock markets aren't the same as the economy as a whole, but stock market bubbles boost the economy when irrational exuberance increases the total apparent wealth. And when enough people decide that it's peaking, it does, and the same process works in reverse, causing a recession.
So yeah, it's a self-fulfilling prophecy, but that doesn't mean there's a way to avoid it. The market prices are already high; they must eventually revert to something closer to a true valuation. But since that time is determined almost entirely by consensus, nobody knows when. Indicators like this one are a sign that people are changing their minds, but it's been that way for a while. They're just indicators of public perception, and the public takes them into account, too.