Not too long ago people were telling me how easy it was to get 4% to 5% “risk free” investing in U.S. government bonds.
“But JC, why would I buy stocks when I can just get my guaranteed 4% and not take any risk.”
I heard this a lot in 2022, 2023.
What could go wrong?
As it turns out, everything.
“Risk Free” Was the Biggest Risk
When things seem too good to be true, it’s because they probably are.
Had you invested in those government bonds earning 4% or so, you would have missed out on historic gains for U.S. Stocks.
The S&P 500 and the Nasdaq didn’t officially bottom until the fourth quarter of 2022.
But the majority of stocks had been heading higher since the summer of that year.
The Nasdaq quickly doubled from those levels.
Stocks – household names – were going up hundreds of percent, even thousands.
Yesterday, we talked about Carvana (CVNA) and its 10,000% rally.
The biggest risk was in not taking any risk.
More Than $7 Trillion in Money Market Funds
The Investment Company Institute publishes the total dollar amount invested in Money Market Funds, by both retail and institutional investors.
Here’s a snippet from last week’s report:
Institutional investors have a near record high in Money Market Funds, now more than $4.1 trillion.
Retail investors are quickly approaching new record highs of close to $3 trillion.
All of this money could have been in stocks.
They’re choosing to miss out on those gains.
Now, granted, I’m sure these investors have their reasons for not wanting to take any risk.
But let’s be serious.
We know a large percentage of that money could have been put to work.
But emotional decision making prevented these folks from moving.
We talked about scared investors fleeing to cash at the exact wrong times earlier this spring.
There is huge risk in sitting on the sidelines during one of the most historic bull market runs in American history.
Here are the S&P 500 and the Nasdaq100, two of the most important stock market gauges on the planet, hitting new all-time highs:
The risk all along was believing it when they tried to tell you government bonds are “risk free.”
How High Can We Go?
This chart comes from our Australia-based Quantitative Analyst Grant Hawkridge.
Grant is plotting both the duration and the amplitude of all the bull markets since the 1950s.
In other words, we’re looking at how long these bull markets have lasted, on average, as well as the average percentage change:
The horizontal red dashed line represents average trading days for all the bull markets.
The red dot representing the current one is still well below average.
The blue horizontal dashed line represents the average percentage change for all the bull markets.
And the blue bar showing the current one is still well below average.
If the bull market ended today, this one would go down as both below average in returns and well as below average in duration.
Is that the bet you’re willing to make?
Do you want to join in on all those investors who are getting “risk free” 4% while the Nasdaq is doubling in their face?
Everybody’s wrong.
And we love to see it.
From irrational decision making comes opportunity for the rest of us.
You’re seeing it in real time.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs