The Motley Fool

Buy Bitcoin? Bonds? Tech stocks? No way! I see a market bubble

Image source: Getty Images.

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?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.