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“Bill, can you explain why you’re holding so much cash?”
My boss and mentor was on the hot seat. And our investors weren’t happy. They felt like they were missing out on some key opportunities and wanted Bill to do something about it!
Fortunately, Bill had a good response. Our investments were performing well, and our long-term returns were well ahead of the market. Plus, our investment strategies allowed us to generate plenty of income even while holding plenty of cash.
Ultimately, Bill was able to convince our investors that we were in a good spot.
But big investors in today’s market don’t have the same luxury. In many cases, these investors are being forced to buy shares of stock. And that forced buying is setting up some very big opportunities for you to profit from the market this year.
Fear of Loss Turns to FOMO
It’s hard to overstate the difference between the market environment at the end of last year and the strength that we’re seeing this year.
Both the extreme selloff in December and the snap back rally this year have been driven by fear.
But there have been different types of fear involved.
Back in December, investors were afraid of losses. We all know what this fear feels like. When you log into your brokerage account and see the balance dropping, it’s natural to want to sell everything and go to cash.
That’s what many individual investors did in December. And institutional investors were forced to sell as well!
You see, if you manage a mutual fund and your investors decide to pull money out of the fund, you absolutely must sell. After all, you have to raise cash to pay the investors who are pulling their capital out.
Hedge fund managers, pension fund managers, and other institutional investors bailed out as well. I talked to many professional investors who still remembered the 2008 crisis vividly. And they wanted no part of a falling market — even though our economy is nothing like what we faced during the financial crisis.
But this year, the forced selling has been transformed into forced buying!
And once again, the action is being driven by fear. Only this time, investors are afraid of missing out on new opportunities.
As the markets have begun to rebound, investors who sold in December are now wishing they hadn’t. And a new type of fear is setting in. The fear of missing out — or FOMO.
The higher the market trades this year, the more acute this fear becomes. Because now, the U.S. stock market has fully recovered the losses from December. And it’s not too far from overtaking the all-time highs we hit last September. How would you feel if you sold when the market moved lower, and missed out on the rebound?
Fortunately, it’s not too late to take advantage of this fear…
Plenty More Room to Run
Hopefully you kept a cool head during the December selloff. During that time, we talked about how the overall economy was still strong, how job growth was continuing, and how corporate profits were growing. The selloff was a clear buying opportunity for cool-headed investors.
Today, there’s still a lot of room for the market to continue higher, thanks to the investors who bailed out of their positions last year.
According to Marko Kolanovic of JPMorgan, hedge funds and other institutional funds still have much less exposure to stocks than they typically carry. And individual investors still have a lot of cash on the sidelines.1 That means there are a lot of people watching this market move higher and wishing they were making money instead of just watching!
As these investors steadily move cash back into the market, we should continue to see stocks march toward new highs.
And the good news is that there are many opportunities to make money in this market. This year, we’re seeing a broad assortment of different stocks from different areas of the market trending steadily higher.
That’s a much healthier situation than a couple years ago when Facebook, Amazon, Netflix and Google accounted for most of the advances.
Today, if you have a balanced approach to investing, buying stocks of different companies in industries from tech, to retail, to industrial companies — and even the banking industry — you’ll do just fine.
Of course, we’ll continue to scour the markets for the very best opportunities to maximize your profits.
But it’s certainly encouraging to know that as the fear of missing out causes investors to steadily commit more cash to the market, we’ll be able to sit back and watch our balanced positions steadily advance.
Here’s to growing and protecting your wealth!
Zach Scheidt
Editor, The Daily Edge
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1 Dow Gains 777 Points Because Sellers Have Become Buyers
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