The brave & the vulnerable

Investing is hard. Most people suck at it. Usually because they cannot control their emotions.

Not the weeping, giddy, lonely, ebullient, lusty kind of feelings reserved for the rest of life. Just the greed and fear part. This is why most DIY investors fail. They buy winners and sell losers.

As this pathetic blog has endeavoured to show over, lo, these many years (17 now) the key to long-term winning and serenity is to go B&D, leave the thing alone and rebalance on your dog’s birthday. The point of being balanced and diversified, after all, is to own a portfolio that can roll with the punches, protect you when the days darken and deliver a reasonably consistent long-term performance.

Rebalancing is essential. Over time some assets swell in value while others may fade. Smart people trim the winners, harvesting gains, and buy the losers in order to restore the 60-40 balance and weightings among the component funds. This is the opposite of what happens in DIY portfolios. There, greed kicks in – making you want to load up on ascending assets – along with fear – leading you to dump the pooches before they go to zero.

Since we don’t know the future, but we do know balance and diversification work, staying properly weighted is wiise. That is the only, singular and divine purpose of rebalancing. To restore order. If it means shedding stars and buying stinkers, do so. It’s manly.

Now, reflect on where we are today.

It’s been a weird year, of Trump, tariffs, wars, mass deportation, political change and soaring markets. Bay Street is massively ahead. The Mag7 are ridiculous. Gold has bolted irrationally. And the benchmark S&P 500 has hit record high after record high. The gain so far in 2025 is just shy of 15% – more than five times the rate of US inflation.

Here’s the chart. You can see what Trump’s ‘Liberation Day’ tariff announcement did to stocks, and then the spectacular (and perhaps irrational) recovery.

US markets defy gravity – and Trump

So if you are rebalancing, the temptation might be to leave the ETF holding the American market intact. Or maybe load up on more. After all, winners are winners, right?

Yup. Until they aren’t – when you wish those gains had been banked, or used to secure unloved stuff at cheap prices that will eventually rotate into grandeur.

These days there are solid reasons to think equities are overpriced, ripe for correction, and ready for a portfolio haircut. “The narrow market leadership presents fragility challenges for investors,” warns Pennock Idea Hub analyst Cam Hui. “The economy is becoming increasingly dependent on the top 20% of consumers, and the market is dependent on Magnificent Seven and AI stocks to lead the market.”

It’s true. Just seven stocks (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, Tesla) now equal a third of the entire main US market index of 500 major corporations. In large part the current fuel for this is AI – which has caused investors to go nuts and pay huge premiums. A torrent of money has turned Nvidia from a $500 billion company little more than a year ago into a $4 trillion behemoth. Is AI the future of mankind? Or is this a dot-com rerun? An historic bubble?

Dunno. Nobody does. Or can.

But this is not a normal situation, and leaving risk on the table – because of avarice – could end up badly. “The market is overextended in the short run and can correct at any time,” warns Hui. “We are seeing emerging signs that a corrective phase may be about to commence.”

He worries that such a small number of stocks has such an outsized impact on the entire market. Hui also points out to the growing lopsidedness of the American economy, where the top 20% of the population by wealth and income are doing well and hold soaring assets while the 80% below live paycheque-to-paycheque.

Lately the US job market is weakening. Hiring intensions have crashed. Tariff costs are worming their way through society. Finances are stressed. And this past weekend’s ‘No Kings’ demonstrations – attended by about five million – showed the depth of political polarization.

“Further extensions of the U.S. government shutdown could dent consumer confidence,” the report states. “We would interpret that outcome as a real-time signal of weakness in the bottom 80% of the consumer and a short-term warning for risk appetite.”

A market correction may be closer than we think. And it’s astonishing how fast greed becomes regret.

About the picture: “Two of our grandsons using Brooke for a pillow,” writes Dan.  “Sadly, Brooke who lived her best life is no more.” 

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/10/20/the-brave-the-vulnerable/