If, however, asset prices floating higher is actually an expression of stress due to exotic strategies being unwound, the Fed might well be emboldened to hike rates more aggressively.

Market crash?
The logical next question is whether investors are being fooled. If higher asset prices are more due to a short-squeeze than fundamentals, and if on top of that, the Fed is more aggressive, are we setting ourselves up for trouble? The stock market crash of 1987 comes to mind.

Does that mean investors should liquidate their positions? Does it mean investors should buy insurance? Regarding the latter, we’ve already pointed out that “insurance” might be very expensive. If you know the market is going to crash tomorrow, by all means, seek protection. That said, we have been cautious on the markets for some time and we have to be aware of the risk that our concern is misplaced.

Underperforming in bull markets
In my experience, investors swallow losing money in bear markets, but are furious if they don’t keep up with the averages during bull markets. When the smartest strategy is to buy the index, bright minds are leaving the industry. What you get is an obsession with indexing.

Beating the average is impossible
Not a week goes by that we aren’t told the merits of index based investing. The average active manager is failing to beat the index. Well, duh, that’s by definition: the average cannot beat the average once fees are included. But does that mean investors should stop thinking?

Buying the dips can be irresponsible
When markets are in a panic, the pundits tell us to buy the dips. As proof, they show the recovery we had from the market bottom in the financial crisis; or any other dip we have had since. With due respect, that too is the wrong way to look at the issue. Investors ought to invest according to how much risk they can stomach. If they had properly rebalanced, they would have taken chips off the table ahead of the financial crisis and then had the resources to deploy cash at the bottom. Yes, in that case, absolutely, buy when prices are cheap.

But that’s not how many portfolios look. Many investors go along for the ride during the good times, and are over-exposed to risk assets. They chase returns because they don’t have enough money to retire. Then, when the market plunges, they lose a great deal of their net worth. Are you telling me that the appropriate way to react in that situation is to double down and put a now disproportionally larger portion of your net worth at risk? If you cannot stomach the risk of an investment, stay away from it. When you lose money, you can afford to take less risk, not more risk. Any pundit suggesting otherwise is, in my opinion, irresponsible.

Don’t confuse indexing with lifestyle investing
If you are a pure index investor w.r.t. equities, you hold the S&P 500 Index and little else; unless you embrace a global view and invest pro-rata in global equities. Very few investors pursue that; instead, we have become what I call lifestyle investors: if you like green tech, you buy a green tech ETF. If you like biotech, you buy a biotech ETF. If you like,..., you get the picture. Sure, you aren’t picking stocks anymore, but you are picking winners and losers. Such a strategy may have worked quite beautifully in recent years because, well, because just about everything has gone up. As a result, if you work with a broker, he or she will have tailored your portfolio to what you feel good about. That’s fantastic, except if feeling good is all you are looking for, just take your kids to the ball game.

Fees matter
The one thing the indexing community has gotten right is that fees do matter. Again, this is math. If you pay less in fees, all else equal, your returns are higher if your fees are lower. As such, if you buy a popular market index through an ETF fees are very low. It’s not surprising that competitive market pressures have pushed prices lower. But it doesn’t mean investors should shy away from a more expensive product, if the segment it is in hasn’t been commoditized, i.e. when it provides value.

Robo-advisors do some good - and bad
In my assessment, the good news about robo advisors is that they have a rigid process to rebalance portfolios. I do not have a problem with anyone “buying the dips” if it is part of an otherwise comprehensive investment program. As I indicated earlier, I only have a problem with it if buying the dips is done for the wrong reasons, i.e. when it violates the risk tolerance of investors and when it is done in already lopsided portfolios.