Have you guys ever heard of this thing called the Tina Effect? I just learned about it and found it really interesting. It might shed some light on why sometimes the stock market rises, even when global growth slows down. Kind of like now, in this weird pandemic!
Fun fact: Apparently “Tina” is also a slang word for crystal meth! But, we’re not talking about that today – drug addiction is not $exy!
The Tina Effect in the Stock Market
TINA is an acronym that stands for There Is No Alternative. Investors use this term when they refer to stocks as the only good place to invest money, even when the stock market isn’t looking so great. The reason stocks remain so attractive (even when they’re ugly) is because people believe the alternative options are even less desirable. Hence, “there is no alternative.”
It’s kind of like saying “the best of a bad bunch.” We know it’s not great right now, but since nothing else looks great either, we may as well just stay the course.
A funny thing happens when everybody thinks there are no good alternatives to stocks… If people hold their positions and keep investing, the stock market begins to (or continues to) rise without any real underlying economic justification. This is referred to as “The Tina Effect.”
A Tina Market Example
Let’s say we’re in a kick-ass bull market and stock prices are on an absolute tear. Yay – everybody’s portfolio is rising in value! Even if your portfolio isn’t 100% stocks, it’s probably grown way out proportion and your asset allocation is out of whack.
At this point, an investor starts scratching her head thinking, “Stocks are getting way overvalued right now… Maybe it’s time to cash out a bit? Or, at least it’s probably a good time to diversify?”
But, after looking around, the investor discovers:
- Bond yields are way down. Treasury bonds seem crap and corporate bonds seem like they have too much risk. The Fed interest rate is extremely low.
- Real estate also seems expensive. Both physical properties and REITs are at all-time highs. Seems pointless cashing out of a high stock market just to buy into a high real estate market.
- Holding cash is unattractive.
- Commodities and alternatives like gold, silver, oil or crypto seem to have unpredictable futures. Plus, these aren’t supposed to make up a huge % of a portfolio anyway.
Sooo… After this research the investor decides to just stay investing in stocks, thinking there is no reasonable alternative or asset class he likes.
The Tina Effect and the Financial Independence FIRE Movement
So, is the Tina Effect a bad thing? Well, yes and no. It certainly helps create bubbles, and big disconnects between stock prices and their intrinsic values. But, I don’t think it’s necessarily bad if someone wants to favor the stock market over everything else.
Stocks are the most popular investment vehicle for people working towards financial independence. In fact, many peeps in the FIRE space have a 100% equity portfolio, and never plan to change it. Broad and low cost index funds truly are the simplest path to wealth.
The only thing we need to stomach are massive swings in the equity market – making sure we stay the course when a recession hits. Easier said than done, of course. :)
Also, a TINA market bubble isn’t really influenced too much by the few million FIRE nerds out there who love index funds. It’s the massive pension funds and other major investing institutions that have a much bigger sway on this stuff. They’re trying to balance cash flow and future payouts based on today’s available investments. Sometimes bond earnings are so low they literally can’t meet future obligations if they invest in them — making a heavy stock allocation the only option. Cool article and example here if you wanna read more!
Is There Really No Alternative Investment (For You)?
I’ll be the first to admit… When someone says the words to me “there is no alternative,” something inside me starts trying to prove them wrong. Maybe it’s the rebel in me — I don’t like being told that I have no options. It’s my natural instinct to challenge this and think outside the box.
Always searching for alternatives is a blessing and a curse.
It’s a blessing because only following proven methods in life can be boring. Thinking outside the box when investing can lead to some awesome successes. For example, a friend’s dad just bought a bunch of goats and is renting them out for land clearing. He’s making ridiculous money. If you told him “there is no alternative to the stock market,” he would laugh in your face. There are other investments out there, everywhere, particularly if you want to start your own business. You just gotta look for them!
But, it’s a curse because every time I think I’m smarter than the market, I fall flat on my face :)
What do you reckon?
Happy Friday! It’s a great day, to have a great day. 😉
Joel is a 35 y/o Aussie living in Los Angeles and the guy behind 5amjoel.com. He loves waking up early, finding ways to be more efficient with time and money, and sharing what he learns with others. Rise Early | Retire Early!