GO
Loading...

Yoshikami: Have We Forgotten About Bubbles ALREADY?

Getty Images

So Jeremy Siegel says the Dow could go to 17,000; I think that's a real possibility. But before we get too euphoric, it probably makes a bit of sense to step back and try to refresh our memories on past asset rallies and collapses. It's important as investors you are not drawn into unbridled euphoria; that's just not realistic.

Remember in 1999 when the tech market was red-hot and it was obvious to experts and investors alike that the market was going to continue straight up. Remember NASDAQ 5000? Do you recall during a 3 year period the market dropped as measured by the S&P 500 over 50%? Or, the NASDAQ dropping 65 percent ?

(Read More: 5% Pullback 'Just a Matter of Time': S&P's Stovall)

Perhaps that's too long ago to recall. Remember when real estate was red-hot in 2006 and everyone was mortgaging their houses to buy rental properties on the confidence that real estate couldn't possibly go down. Real estate proceeded to drop over 50% in value in many parts of the country. So much for guaranteed appreciation.

Okay, how about something even more recent. Remember when Ben Bernanke went on 60 Minutes to reassure the world that the U.S. economy was not falling apart. He was not only reassuring the world about the economy but investors who had just endured yet another 50 percent drop in the markets.

Remember when Apple was at $700 a share? Even with a low PE ratio and $140 billion of cash, the stock still corrected downward. Understand that I'm a believer that Apple will rebound, but even we were surprised at the intensity of the downturn based on collapsing sentiment. Such is the nature of the market.

(Read More: This Chart Shows Dow Should Be Lower...a Lot Lower)

I don't mean to throw cold water on market enthusiasm or even suggest that an impending gigantic correction is inevitable. What I do want to point out is that just when the world thinks that it is inevitable that the market will go one particular direction, it sometimes goes the other way. The cry always is that this time it is different. Frankly, it's never different. History tends to repeat itself.

So with this litany of recent disasters in mind, how should one invest in today's market?

As we are wealth managers at Destination Wealth Management, we are paid to remember not only that markets and assets can rise but they can also drop as well. We are fundamentally conservative. We are positioning portfolios on the assumption that Federal Reserve liquidity will continue to juice the markets perhaps beyond a reasonable point. But we also realize this country has $16 trillion in deficits, an 8% unemployment rate, and structural issues in the economy that need real fixing. All is not perfect to be sure.

Our strategies vary based on our investors' time horizons and financial goals. We are a planning based firm so our important measure is helping clients move towards their goals. Depending on our clients' objectives, we invest in selective equities but do take a more conservative approach in our investment strategy including buying dividend paying stocks (which also may be subject to bubble like activity given the strong rally over the last several years). We buy shorter-term fixed income assets given that interest rates are at historically low rates and economic activity may pick up causing the Fed to abandon quantitative easing. We also look at gold as a hedge against financial Armageddon.

(Read More: Fed, Bond Markets Are Sizing Each Other Up)

The bottom line is this: We tend to buy the more conservative asset when faced with two alternatives because of our belief that eventually reality will kick in.

So that's how we invest. Remember that we are conservative in our perspective and that may not match what you're trying to accomplish in your strategy.

"But wait", you say. "I want big returns!" We all do of course. But are you able to withstand the pain and drama that occurs when a vicious market correction occurs. Everyone is a long-term investor when markets are rising. The question you have to ask yourself is this: Can you hang in there when markets are down 40 percent and headlines scream that the world is collapsing? You need to really know your tolerance for pain and anxiety before you invest. Being defensive has a price of course as returns are lower if you invest conservatively. But perhaps that makes sense given the dramatic plunge that can occur when a bubble pops.

(Read More: SEC Pokes Nasdaq; Dow to 28,000? Chinese M&A Sizzle)

My point is this; invest on the assumption that unforeseen negative news or sentiment can pull markets the other direction. Don't expect markets to behave rationally. By nature they are driven by data AND sentiment and do not go up in the straight-line. Markets are like an irrational teenager; don't ever forget that.

Am I being paranoid? Perhaps. But when you look back over the last 10 years and see asset classes losing over 50 percent of their value on multiple occasions, perhaps paranoia is just being prudent.

Invest based on your own time horizon and risk tolerance, and most of all, never forget. Remember the pain as well as the euphoria and that will guide the best investment strategy for your situation.