Disclaimer

Do your homework before you invest. I am not a professional. I just enjoy investing. I am often wrong.

Monday, February 12, 2018

Chasing Returns

When the market goes up, everyone wants to try to call a top. It is as hard to call a top as it is to call a bottom when the market goes down. everyone thought the 2008 bottom was in November but it was actually in spring 2009.  Very few saw the top coming in 2008 and 2001.

That being said, one sign of an overbought market is "chasing returns" through leverage.  That occurs when people use real leverage (loans) or artificial leverage (options and other leveraged products) to try to increase their returns on a basic investment. Often those investors do not understand the risk they face if their investment declines.

Another sign of an overbought market is chasing returns through alternative investments.  That occurs when people turn to alternative currencies, emerging markets, legeraged ETFs, and other unusual investment products they are unfamiliar with to get the returns they had been getting in common stocks, real estate etc.

Often when leverage and alternative investments collide, you are ripe for a correction.

I'm not sure we're there yet, but of course, I can't call the top.

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