Back in early January, I penned an article entitled 4 investment bubbles to avoid in 2018Â that looked at a number of assets that I thought were risky. Among these assets were Bitcoin, FAANG stocks, and expensive small-caps, all of which had experienced strong price rises in 2017.
Today, I want to look at how these assets fared in 2018. Are there any key takeaways for investors?
Bitcoin
Bitcoin has had a shocking run in 2018 so far, losing around 75% of its value. However, this doesnât surprise me, as back in January, I noted that the cryptocurrency was exhibiting all the classic signs of an investment bubble and stated that it was a ârecipe for disaster.â So, that call looks pretty good now. And I donât think the worst is over for Bitcoin either as I believe it may continue falling.
The key takeaway from Bitcoinâs demise? Be careful of bubbles! Investment bubbles really arenât that hard to recognise. For example, one classic bubble indicator is an exponential rise in price. Thatâs usually easy to spot on a long-term chart. Another classic indicator is when people who donât normally invest any of their money at all are getting involved. This last time year, people all over the world were quitting their jobs to become âcrypto-tradersâ. Third, outrageous price predictions are another warning sign. If an asset is exhibiting a few of these bubble signals itâs often just best to steer clear.
The FAANGs
The FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) had an interesting year. For the first two-thirds or so of 2018, these stocks continued to perform well. In August, Apple became the first company to reach a valuation of $1trn, closely followed by Amazon in September. However, the last few months have been a different story.
Since hitting their year highs, Google is down around 20%, Amazon has fallen around 25%, Apple is off around 30%, and Facebook and Netflix have both fallen around 35%. Of the five stocks, Facebook, Apple, and Google are down for the year. Clearly, the FAANG surge that so many investors were piling into in 2017 is now over.
The takeaway? When a stock has strong upward momentum, thereâs money to be made. However, if the trend breaks down, things can end badly, especially if the stock trades at a super-high valuation and is âpriced for perfectionâ. As they often say in investment circles: âThe trend is your friend, until it ends.â
Expensive small-caps
It was a similar story with expensive small-cap stocks in 2018. While markets were rising in the first half of 2018, many of these stocks continued to climb. Yet as soon as market sentiment changed, many of them experienced sharp declines.
Fevertree Drinks is a great example. While Fevertreeâs share price surged all the way from 2,200p to 4,000p between January and September, since then, it has come crashing back down to 2,200p. Anyone who bought the stock around July or August would now be sitting on big losses.
The takeaway here is that you have to be careful with stocks that are trading at sky-high valuations, as a little bit of market weakness can see their share prices plummet. As always, portfolio diversification is important.