Author: Jason Hsu, PhD
Every market cycle, I see the same pattern play out. We reach a point of stretched valuations—where P/E ratios sit near historical highs and, we are told, value investing is an irrelevant art applied by fools who drive using the rear-view mirror—and the financial world splits into two loud, opposing camps.
In one camp, you have the rationalists. They point to the Fed model or the Shiller P/E and say, “History proves this is unsustainable. Get out now.” In the other camp, you have the “this time is different” crowd. They argue that a new paradigm—whether it is the internet in the late 90s or AI today—has fundamentally changed the laws of economic gravity.
Here is the uncomfortable truth: both camps are often right, and both are often disastrously wrong.
Rationalists like Robert Shiller were correct about the Tech Bubble and the housing crisis, but the warning often arrived years before the reckoning. Shiller was sounding the alarm in December 1996 — the month of Greenspan’s “irrational exuberance” speech. The S&P 500 rose more than 115% and the Nasdaq more than 200% before the peak arrived in March 2000. Being right about valuations and knowing when to trade on them are not the same thing. Conversely, the momentum chasers often look like geniuses for years, leveraging concentrated bets on the latest darling, only to give back all their gains (and then some) if and when the bubble finally bursts.
As financial advisors, how do you navigate this? How do you thread the middle ground between being “right but early” (which feels a lot like being wrong) and being “right for a while, then broke”?
The answer isn’t better market timing. It’s abandoning the obsession with the wrong target. It is time we stop treating the S&P 500 as the only metric of success.
The “9th Inning” Problem
Investing during a “FOMO” rally is more art than science. We simply don’t have enough historical data points to quantitatively pin down the exact moment a bubble will pop. Everyone loves to guess which inning we are in—”We’re in the 3rd,” “we’re in the 7th.” But notice that nobody ever says, “We are in the 9th inning.” Why? Because by the time you know it’s the 9th inning, the game is already over.
If you are waiting for a clear signal to exit, you are waiting for a signal that doesn’t exist until it is too late. This uncertainty is exactly why strict adherence to outperforming a benchmark is so dangerous for private wealth clients.
Institutional Metrics vs. Human Goals
We have to distinguish between institutional money management and wealth management. For a Wall Street fund manager, alpha is an IQ test. Beating the benchmark is how they prove they know something the market doesn’t. That makes sense for them.
But your clients are not active fund managers whose value is defined by outsmarting the market. They are people who have little love for the game of investing; they tolerate it simply because they need to invest well to retire better.
If you ask a client about their life’s purpose, their retirement vision, or their legacy, not a single one will say, “My goal is to beat the S&P 500 by 50 basis points.” Beating the index doesn’t pay for the lake house. It doesn’t fund the grandkids’ education. It creates an emotional high for the advisor—proof that you are “smart”—but it doesn’t necessarily serve the client’s actual outcome.
When the S&P 500 becomes detached from reality—driven by speculative fervor and valuation multiples that defy gravity—it behaves like a crazy person. And as I often say: You don’t need to beat a crazy person to validate your own worth.
The Courage to De-Risk
Let’s apply this to the current moment, whether we call it an AI revolution or an irrational FOMO bubble. Suppose a client has ridden this wave. They are sitting on substantial gains. They are well ahead of their financial plan.
The conventional industry pressure says, “You must keep participating. You must own NVIDIA at any price or Tesla at any multiple, because if you don’t, you will trail the index.”
But the client’s actual objective here isn’t to beat the index; it is to secure victory in the form of a retirement without financial worries. If you are in the “7th inning” of a bubble (or maybe the 8th?), what do you really gain by riding it out to the very end? You might squeeze out a spectacular return. Or, you might face a spectacular blow-up. If that outcome is close to a coin flip, is that a gamble a retiree needs to take?
The right conversation to have with a client today isn’t about relative performance. It is about goals. It sounds like this:
“You have won the game. We are ahead of schedule. We don’t know if this market is rational or irrational right now, but we know you don’t need to take this risk to achieve your dreams. Let’s take the win. Let’s de-risk.”
Advisors Are Not Traders
The financial advice industry has arguably institutionalized a metric that hurts clients. By using standard benchmarks as the sole indicator of winning or losing, we encourage advisors to act like traders, not retirement planners.
I want to challenge advisors to stop trying to be Wall Street fund managers. Alpha is great, but asset allocation is what saves retirements. Understanding that “enough is enough” is a skill that Wall Street algorithms don’t possess, but human advisors must master.
Sometimes, the bravest thing you can do is underperform a raging bull market because you are protecting a client’s future from the hangover that has historically followed. Sometimes, the right solution is not to beat the S&P 500. It’s to ignore it and focus on the only number that matters: the one that allows your client to sleep at night knowing that their retirement is going to be just fine.
Important Disclosures
The views expressed in this article are those of Jason Hsu and are provided for informational and educational purposes only. They do not constitute investment advice, a recommendation, or an offer or solicitation to buy or sell any security. References to specific securities are for illustrative purposes only and do not constitute a recommendation to purchase, hold, or sell those securities. Past market events and performance are not indicative of future results. Investing involves risk, including the possible loss of principal. This material is intended for independent financial advisors and registered investment advisers (RIAs) and is not intended for distribution to retail investors. Sowell Management is a registered investment adviser. Registration does not imply a certain level of skill or training.
