The stock market has increased 24% in 2024, and many investors think we will see a "melt up" in 2025.
But at the same time, share prices are sitting at all time highs.
On top of this, stocks are trading at high valuations, meaning their profits are tiny compared to their price.
Which may leave you wondering, is now a good time to invest?
So today I will talk about what's behind the "melt up," why you should care, and what you can do to maximize your investments.
What is a Stock Market Melt Up?
A "melt up" is when stock prices increase in a way that defies expectations.
This happens when money is easy to come by, optimism is high, and greed takes over.
An example is when interest rates were lowered to zero during the Pandemic, shooting the market up 107% in 9 months.
This was driven by lots of "easy money," like low interest mortgages and stimulus checks, driving up demand for assets like real estate, stocks, crypto, and even Pokรฉmon cards.
There was also much optimism as the world adapted to a remote-work environent and every company tried to capitalize off of this "new normal."
Then the greed set in.
As more people started making money investing, a collective "Fear Of Missing Out" (FOMO) set in.
More demand = higher prices = more FOMO = more demand = higher prices = MELT UP.
If we look at today's market, the same pattern of easy money, high optimism, and greed seems to be setting in.
The Federal Reserve is now lowering rates, though not as drastically. The difference this time is that Donald Trump is now President-Elect and is expected to cut taxes, which will also create easy money.
Investor's are also optimistic about the econoy under a Trump presidency. In November 2024, the United States Economic Optimism Index, which measures consumer confidence, jumped double digits to 53%, back to where it was just before President Joe Biden took office.
The last step is for greed to set in, and currently the CNN Fear & Greed Index is swinging between Greed and Neutral.
This is an index that measures multiple indicators to determine whether the market is being driven by Fear or Greed.
Personally, I've been following this indicator for my entire investing career, and I've found it to be a solid guide for how much FOMO is driving the market.
And right now, this indicator is on the brink of flipping from Neutral to Greed, which is likely when a "melt up" would happen.
How to Make Money in the 2025 "Melt Up"
Whether or not 2025 turns out to be a melt UP or a melt DOWN, I don't know.
But what I do know is how to manage an investment portfolio in any type of market, and here's my framework so that you can do the same.
1. Stay Invested: The worst thing any investor can do is to time the market. Studies have shown that even someone with perfect market timing wouldn't make that much more than someone with terrible market timing. The real losses happen to investors who sell their investments out of fear or a belief that the market "has to come down." Sure it may crash 20%, but it might go up another 100% before that happens, and you don't want to miss out on those gains.
2. Diversify and Rebalance: Diversification is the best method to reduce risk and enhance your investment returns. The sweet spot for diversification is to hold ~20-25 investments that are not super correlated with each other. For example, 20 different Tech stocks is not diversification. They also need to be similar sized positions. For example, having a portfolio with 81% Nvidia and the other 19% in 19 other stocks is not diversification.
Diversification also doesn't always stick, which is why it is important to rebalance. For example, if 10% of your portfolio was in Nvidia, it may have gone up so much relative to your other stocks that it is now 20% of your portfolio. This means you are no longer diversified and you need to rebalance to bring diversification back into your portfolio.
Rebalancing can take as little as 5 minutes, and only needs to be done once or twice per year. If you haven't looked at your portfolio in a while, now is the time to do so. If you have questions or don't know where to start, reply to this email and I'd be happy to hop on a call with you!
3. Know What You Own: The last step is to know you own. In my experience, most investors don't actually know what's in their portfolio, ESPECIALLY if they have a professional advisor. I've been doing this for over a decade, and it still shocks me to see the assets that some financial advisors put in their clients' portfolios...whether you have an advisor or not, buying assets you don't fully understand is a very consistent way to lose money. Unfortunately, this becomes more common during a Melt Up, as people make new investents that were not on their radar 6 months ago. Looking at you, Crypto. So please, if you ignore everything else in this framework and still want to YOLO your life savings into the market,at least take some time to understand what it is you're buying.
Next Steps
Now that you know what a Melt Up is and what you can do to maximize your investments, you'll want to check out this video I made where I go over How to Build a Successful Invesmtent Strategy.๐๐ป
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