Of greater concern of late is the “Twitter” and rising
animal spirits. “New age” internet stocks, like Zillow, Netflix, and Facebook,
have been on a tear lately, some of them up by over 200% in the last year. On
top of this, Twitter, a social media company, recently announced it will go
public. Why now? Twitter and its bankers sense the market is ready for it….the
“animal spirits” of the market are ready and salivating for the next quick flip
IPO.
Traditionally, when we talk about “animal spirits”, it
refers to the human propensity for taking on more risk when things “look good”,
when the market’s been up, and, oh yes, when it now seems OK to take on more
risk. That smacks of “overconfidence” and overconfidence is a problem for the stock
market.
While we suspect there is more upside for the stock market
in the near term, the rising animal spirits may be an early warning sign that
the market is no longer be “cheap” and that market “risk”, or volatility, may
be increasing. From a financial planning perspective, the best way to protect
retirement and investment portfolios from volatility is through appropriate
asset allocation and diversification. Holding multiple asset classes in a portfolio
reduces risk because different asset classes typically behave differently in
different parts of a cycle (for example, bond prices usually go up when stocks
go down). Sticking to a long-term financial and investment plan also lowers
risk by reducing the temptation to “time” the market and buy or sell at the
worst possible time in the cycle.
