Optimism is rising in the new year after global equity markets ended 2020 strong. Headlines tout extraordinary success stories—the investors who made fortunes thanks to skyrocketing shares of electric-vehicle makers or soaring cryptocurrencies. It seems like enough to make many investors want to follow suit. But in Fisher Investments’ view, long-term investors should refrain from making big portfolio shifts out of greed. Emotion-driven decisions can jeopardize your long-term financial goals.

The stock market is an auction and, like any auction, supply and demand for stocks determine prices. We think stocks have three main drivers that affect demand: economics, politics and sentiment. Economics refers to the business conditions affecting corporate profitability. Politics can affect the earnings outlook, too, as legislation, policy and regulation create winners and losers. Sentiment refers to investors’ general mood, tilting their broad view about the future up or down. Forward-looking stocks focus on how these three drivers affect demand over the next 3–30 months, according to our analysis.

Prevailing market sentiment influences returns by helping set expectations. If investors are generally fearful, as they were during March 2020’s sharp downturn, it doesn’t take much to exceed expectations and generate a positive surprise. Conversely, if expectations are lofty, like in 2000’s dot-com bubble, reality has an easier time disappointing. Hence, Fisher Investments believes markets move mostly on how reality squares with expectations. Presuming nothing catastrophic knocks a bull market before it runs its natural course, sentiment evolves as investing legend Sir John Templeton described: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Investors’ challenges evolve alongside the sentiment cycle. When pessimism or skepticism reigns, their big temptation is to avoid stocks, fearing potential declines. But when the cycle heats up, managing greed becomes the primary challenge. Rather than shunning stocks, investors, buoyed by rising optimism, see sunnier times ahead—and become increasingly willing to buy.

Based on Fisher Investments’ research, sentiment is now broadly optimistic, so the likely challenge ahead is that folks increasingly will become overly optimistic—or, in Templeton’s terms, euphoric. Investments with eye-popping returns over the last year receive widespread press coverage, which touts the get-rich-quick success stories of those fortunate to be onboard. This might stir fear of missing out—FOMO—or the envy of spectacular gains and attention others enjoy from their concentrated positions. Since the press usually focuses on a few impressive winners—not those whose bet-the-farm mentality didn’t pan out—big returns may look easy and market-like returns may appear boring in comparison.

Stories of investors trying to catch up with the Joneses—and lap them—are prevalent. Some investors are going on margin—borrowing with their own account as collateral—to buy options to boost potential returns. However, this investing tactic could cause you to lose more than your initial investment. Others are loading up on initial public offerings (IPOs) of special-purpose acquisition companies (SPACs), allured by the promise of hot returns. Those firms go public with no actual underlying business, seeking to merge with a to-be-determined startup. Yet those returns aren’t guaranteed. Buying a SPAC IPO equates to buying blind since you don’t know what company the SPAC will merge with—another risky decision. How can you build a portfolio that features companies with businesses that are TBD?

The prospects for striking quick riches can blind investors to a more sobering truth: Acting on greed can easily carry you away and leave you poorer. Chasing heat (i.e., buying something after it has run up big and built up lots of hype) isn’t a sound investment thesis, in our view, because it is based on past performance—irrelevant to forward-looking stocks. Allowing greed to dictate investment decisions can cause you to deviate from an asset allocation—your portfolio’s mix of stocks, bonds, cash and other securities—designed to help you reach your long-term investment goals. For example, if you require cash flow from your portfolio, you may own some bonds to dampen short-term volatility. If you dump your bond allocation to chase heat, your portfolio may no longer provide for this need—putting yourself in a tough position if you are wrong. Is the allure of hot returns worth missing cash flow?

Rather than pile into securities with hot streaks, take a moment to think clearly about your long-term objectives. Be an investor, not a speculator. If you are investing for long-term growth to fund retirement, achieving market-like returns is what you should aim for, in Fisher Investments’ experience. It may not be as exciting, but it shouldn’t be. Extraordinary gains imply extraordinary risk—and dangerous portfolio overconcentration.

Adequate diversification means your portfolio won’t depend on a few securities. There will be winners and losers, but none by itself should drive the bulk of your portfolio’s returns—or set you back irrevocably—for the length of time you need your money to work. Fisher Investments believes compounding such gains over time is the surest path to long-term financial success. Channel your greed properly by remembering this and resisting the temptation to cash in early.

It is all too easy to get caught up by bubbling enthusiasm and tales of others receiving windfalls in niche areas. In Fisher Investments’ experience, that is when you need to stay extra vigilant against greed. Going down that path risks pitfalls and pain you may not be able to ride out.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

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