First, I wish all UK investors a happy New Year and positive returns in 2021. However, when I look back at 2020, I see multiple signs of a near-universal market bubble. Investor sentiment seems to be universally bullish and upbeat ‘groupthink’ rules the markets. Ultra-low interest rates and extreme market volatility have drawn millions of newbie speculators to trade financial assets (I call this group ‘the Robinhood herd’). Also, this mania has been fuelled by workers having more time on their hands by working from home. In the words of the late, great Prince, we’re all partying like it’s 1999. But I remember all too well what happened from 2000-03, when that particular market bubble burst spectacularly.
Market bubble #1: bonds
At heart, bonds are very simple investments. They are debt securities: IOUs from organisations or governments that pay interest (coupons) and then return your capital (principal) on maturity. Globally, the bond market surpasses the stock market by tens of trillions of dollars. But almost all bond markets — and especially those of the US and UK — have enjoyed a 35-year bull market since the mid-1980s. This generational bubble must surely burst some day?
As interest rates fall to previously unimaginable lows, bond prices have skyrocketed and annual yields have collapsed. Across the globe, yields for top-rated bonds are negligible or even negative. For at least 50 years, financial advisers have recommended a 60/40 portfolio split between stocks and bonds. Alas, with bonds now overpriced, low-yielding and volatile, they no longer properly protect portfolios from risk of loss. Hence, my family portfolio has zero exposure to this market bubble today.
Market mania #2: Bitcoin
As a former mathematician with over four decades of computing usage, I grasp the principles behind cryptocurrencies. However, despite being an old nerd, the wild enthusiasm of ‘Bitcoin bros’ terrifies me. In the previous Bitcoin boom, the BTC price peaked at nearly $20,000 in mid-December 2017. When this market bubble burst, Bitcoin collapsed to around $3,250 a year later, crashing by more than four-fifths (83.8%) in 12 months.
As I write, Bitcoin trades at around $29,400 — roughly 50% above its 2017 peak and just $300 short of its all-time high. With close to 19m Bitcoins in circulation, the market value of the original cryptocurrency is over $540bn. That’s more than half a trillion dollars built on faith, and unanchored by any underlying hard asset, intrinsic value or fundamentals. For me, Bitcoin is one huge market bubble just waiting to burst. When it does, I imagine the crash will play out like 2018 all over again.
In summary, with the world awash with cheap liquidity and retail speculation at record highs, it is frothing with market bubbles today. I also see big bubbles in US tech mega-caps, electric-vehicle makers, new issues and listings, and a host of other high-priced, low-yielding assets. That’s why in 2021 I will de-risk my family portfolio by bailing out of bubbles and moving our capital into cheap, high-yielding FTSE 100 shares.
In my family portfolio, I’m looking to add reasonably priced shares in well-run, quality businesses. Ideally, I’m after stocks with low price-to-earnings ratios and high earnings yields. Likewise, I seek out high-yielding shares, using dividends to generate a passive income and boost long-term returns. With the FTSE 100 falling 14.3% in 2020, there’s no shortage of attractive Footsie shares today. That’s why cheap, mega-cap stocks will be my #1 pick for superior returns this year.