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Stock market bubble? - What you need to know.

RL070 - Retirement Lifestyle: Stock market bubble? - What you need to know.

Today on the Retirement Lifestyle Show, Roshan Loungani, Erik Olson, and Adrian Nicholson dissect Ray Dalio's stock market bubble article. They analyze the low-interest-rate environment, the retail investor's role in the stock market, and the difference between risk tolerance and risk capacity.

[05:49] Ray Dalio's Stock Market Bubble

[11:43] Emerging Tech Stocks and the Stock Market Bubble

[17:31] The Effects of Interest Rate Policies on Stock Market Bubbles

[20:22] Valuation Models to Measure Bubble Level of Stock Prices

[24:40] The Low-Interest Rate Environment

[33:53] Understanding the Difference Between Risk Tolerance and Risk Capacity

[34:47] Dissecting Recent Market Pullbacks

[45:47] How to Capitalize on Market Bubbles

[48:10] Are we in a Stock Market Bubble?

[53:42] The Ever-rising Influence of Retail Investors in the Stock Market

For links and the full show notes keep scrolling down!

Roshan Loungani can be reached at or at 202-536-4468.

Erik Olson can be reached at or 815-940-4652.

Adrian Nicholson can be reached at or at 703-915-8905.

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Full Show Notes:

Ray Dalio's Stock Market Bubble

Ray Dalio, the founder of the world's largest hedge fund, Bridgewater Associates, recently revealed that the stock market is a bubble "halfway" to the magnitude of those witnessed during historic market crashes such as the Great Depression. In an article published in early 2021, the billionaire investor tapped into his years of market experience and launched the "systemized" bubble indicator. According to Dalio, a market bubble is defined as an unsustainably high price and is measured in six distinct ways:

  1. How high are prices relative to historical measures?

  2. Are prices discounting unsustainable conditions?

  3. How many new buyers have entered the market?

  4. How broadly bullish is sentiment?

  5. Are purchases being financed by high leverage?

  6. Have buyers made exceptionally extended forward purchases to speculate or protect themselves against future price gains?

In summary, Dalio's aggregate bubble gauge for the overall US stock market is around the 77th percentile. In contrast, the bubbles of 1929 and that of 2000 had a 100th percentile reading. Thus, according to the gauge, the US stock market is in the middle of a stock market crash ready to happen. However, the indicator maintains that some stocks, particularly emerging tech stocks, are in extreme bubbles, while some stocks are not in bubbles.

The Low-Interest Rate Environment

In trying to combat the effects of the pandemic, the US implemented record low-interest rates that experts predict will remain low for the foreseeable future. So, what is the low-interest-rate environment, and how does it affect you as an investor? The government commissions low-interest-rate environments to stimulate economic recovery by making it cheaper to borrow money for financial investments. Although low-interest rates might sound enticing to some investors, it spells doom for others.

For example, low rates are welcome news for homeowners because it reduces the amount of money they have to pay towards their monthly mortgage payments. On the other hand, lower borrowing rates mean lower returns on investment vehicles such as savings accounts.

Understanding the Difference Between Risk Tolerance and Risk Capacity

Risk capacity and risk tolerance are the two most important financial concepts every investor should differentiate before investing. When applied together, the two terms help determine the amount of risk that should be taken when weighing investment options. Risk tolerance is defined as the degree of uncertainty an investor's portfolio can handle. For the most part, risk tolerance is often influenced by income, age, and financial goals.

In contrast, risk capacity is your objective ability to withstand a loss of a certain amount when pursuing financial goals. It is also defined as the amount of risk you as an investor "must" take to achieve your financial goals.

Links and Resources

All opinions expressed by podcast hosts and guests are solely their own. While based on information that they believe is reliable, neither Arete Wealth nor its affiliates warrant its completeness or accuracy, nor do their opinions reflect the opinion of Arete Wealth. This podcast is for general informational purposes only, and should not be regarded as specific advice or recommendations for any individual. Before making any decisions, consult a professional.

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