The Turning Point: When Will You Re-Engage with the Stock Market Amidst Uncertainty?

The Current State of the Market

As of this writing, the stock market is in a downward trend, with NASDAQ approaching new all-time highs. Many have missed the recent rally, finding themselves wondering when they should re-engage. Some expert investors are now in cash as they navigate the uncertain terrain. Is FOMO (fear of missing out) something you're grappled with too?

The Impact of FOMO

Professional investors do not subscribe to the FOMO mindset. This attitude is more common among novices. It's important to recognize that we are far from over the Covid-19 slowdown. Some businesses will not recover, and many successful business models will suffer if social distancing persists. In times of uncertainty, holding cash becomes a pragmatic and sensible strategy.

My Personal Experience

I've been actively trading and investing for over two decades, learning to trust my own instincts and advice rather than that of market gurus. On any financial news channel, you'll encounter experts recommending one asset one day and another the next. Could all of them be right? Of course not.

One valuable lesson I've learned: if the broad market index SP-500 is outperforming, there's no reason not to stick with the index proxy ETFs like SPY. The QQQ ETF has outperformed by nearly 100% over the past decade, making it a strong contender as well. But why not hold TQQQ, which has a leveraged exposure to QQQ and surged to nearly double the return in a panic, now trading near 90?

The world of investing often reflects the wisdom used in the film Men in Black: “A person is smart, people are dumb.” Many investors believe they are being cautious when they are actually making costly mistakes. The safest investment is accumulating wealth rather than preventing its loss.

Why Are the Markets Rising?

A much more pertinent question is: Why are the stock markets surging despite the barrage of negative news—from Covid-19 and trade wars to racial discrimination and civil unrest? Quarterly reports will continue to be discouraging for at least the next three to six months.

The Trump administration may not survive another term, and if it falls, significant legal repercussions will be in store. The Federal Reserve is injecting trillions to purchase corporate debts, and oil prices have swung dramatically. In this landscape, is the market truly reflecting the underlying fundamentals, or is it driven by liquidity and sentiment?

Resolving this puzzle is crucial. If the upcoming presidential election leads to legal consequences for the incumbent, it will affect market conditions. The Fed's actions, while providing liquidity, might also be inflating asset prices. Oil prices' volatility suggests an unstable environment. All these factors make the current market complex and uncertain.

Your Choice

Are you treating your investments like a hobby or running a hedge fund? The decision is yours, but it should be made with a clear understanding of the risks and opportunities. The market is not always rational, and emotions can drive prices. Consider these factors before making your move.

Ultimately, the stock market is driven by sentiment as much as it is by fundamentals. Whether you believe in staying in cash, leveraging your investments, or holding a diversified portfolio, it's essential to have a clear rationale and plan. The key is to avoid impulsive decisions based on fear or greed.

As I stated, I am all in, but this is a personal choice. You must determine what is best for your own financial situation and risk tolerance. Whether you choose to re-engage with the market or maintain your cash position, understanding the underlying forces driving markets is crucial.

Only you can decide when you’re ready to get back in. Make sure you understand the market’s dynamics and make a well-informed decision.

Key Takeaways:

Understanding market fundamentals is essential for informed investing. Market sentiment can play a significant role in asset prices. Professional investors rely on their own judgment, not on the advice of market gurus. Cash can be a smart asset in uncertain times. Be cautious of FOMO and focus on long-term strategies.

Edit: This article was originally posted in May when the market was on an upward trend. At that time, I expected the market to reach near the end of 2019 levels and then decline. The current market conditions reflect this expectation.