EXACTLY What Happens Before A Stock Market Crash | Hank Green

Stock Market Bubble Concerns Driven by AI [00:00]

• Many believe the stock market is in a bubble due to AI's pervasive influence and historically high valuation metrics.
• The Price-to-Earnings (PE) ratio is at levels not seen since the dot-com bubble.
• The Warren Buffett indicator is at its highest historical level.
• A video from Hank Green is mentioned, discussing how he's reshaping his investment strategy due to these concerns.

The current market sentiment suggests a potential bubble driven by widespread AI adoption and elevated financial indicators. This situation is prompting a reevaluation of traditional investment approaches.

A lot of people right now believe that we're back in a stock market bubble because you have AI taking over just about everything.

The Case for Diversified Index Fund Investing [00:37]

• Disciplined investing in the broad stock market over the last 30 years has generally yielded positive results.
• Active trading, day trading, and trying to pick individual stocks often leads to underperformance compared to the market.
• More than 90% of investors who buy and sell individual stocks end up losing money, supported by numerous studies.
• The more one buys and sells, the more they tend to lose on average.
• While a few individuals with deep segment knowledge and luck can beat the market, for most, buying an index fund is the best approach.
• The speaker admits they would have been better off sticking with index funds instead of buying individual stocks, despite some individual stock successes, due to losses in other investments.
• The simplest strategy for most is to buy consistently and hold.

The consensus is that a passive, diversified approach through index funds is superior for the majority of investors, as active trading often results in losses and significant time investment without commensurate returns.

For most people, it's all you have to do. Just buy consistently and hold. Super easy, super simple.

Understanding Low-Cost Index Funds and Market Cap Weighting [02:06]

• Low-cost US equity index funds have been a staple for the last 30 years, tracking broad market indexes like the S&P 500.
• These funds invest in the market itself rather than trying to outsmart it.
• Low costs are crucial, as even small annual fees (e.g., a few dollars per $10,000 invested) compound over decades and can significantly reduce future returns.
• Modern index funds offer exceptionally low expense ratios, with some as low as 0.04% or even 0% (like Fidelity's FZROX).
• Index funds are weighted by market capitalization, meaning larger companies with higher total stock value have a greater proportion in the fund.
• This weighting means the top 10 companies often account for a significant portion of the index's growth, sometimes over 90% of the S&P 500's growth.
• Companies within the index change over time; the largest companies 30 years ago are largely different from today's leaders, reflecting companies rising and falling.

Low-cost index funds offer an efficient way to invest in the market, with their market-cap weighting strategy giving larger, successful companies a greater influence on returns. The dynamic nature of these indexes ensures investment in growing companies.

The fund is just riding the market.

Risk-Adjusted Returns and Portfolio Concentration [04:48]

• Personal investments beyond broad index funds can lead to constant worry about under or overperforming the market.
• It's essential to consider risk-adjusted returns, not just raw performance. The risk taken to achieve a return is a critical factor.
• A guaranteed 6% return with no risk is different from a potential 50% return with a high risk of losing everything.
• Balancing volatility and the risk of loss against expected long-term returns is key.
• Accepting a lower, safer return is often preferable to a higher-return, higher-risk investment.
• Over the last 5-10 years, the top 10 companies have represented an increasingly large percentage of the S&P 500 index fund, reaching approximately 38%.
• During the dot-com bubble, the top 10 companies made up about 25% of the S&P 500; today, this figure is closer to 40%.
• This increasing concentration is concerning, as a similar level of concentration preceded the dot-com crash.
• The counterargument is that today's dominant companies are highly profitable due to the internet, capturing significant market share.

Evaluating investments requires a nuanced view of risk and return, and the growing concentration of the S&P 500 in its largest companies, largely driven by AI, presents a potential risk that warrants consideration.

You can't just look at like, oh, this underperformed and therefore it's bad. That to say, okay, how much risk did I take to get that investment because there's a huge difference between I could make 50% of my money this year, but risk losing all of it or I could take a guaranteed 6% return with no risk whatsoever.

Function Health Sponsorship and Personal Health Insights [06:01]

• Function Health is a sponsor that provides comprehensive body biomarker testing, covering over 100 biomarkers including heart health, hormones, toxins, inflammation, and stress.
• The speaker shares their personal experience, discovering high LDL cholesterol and TOP antibodies, indicating potential thyroid dysfunction.
• These results prompted adjustments to diet, stress reduction, and supplement intake.
• Function Health provides actionable plans to address out-of-range biomarkers, moving beyond just presenting data.
• The speaker reports feeling improvements in energy and sleep quality since making changes based on the health assessment.
• The service is accessible, with labs available at over 2,000 US locations.
• The annual cost is $499, equating to about $1.37 per day, significantly less than the potential $10,000+ cost of individual tests.
• Leading health experts are associated with Function Health.
• A discount code (Graham 100) is offered for the first thousand sign-ups, providing $100 off.

Function Health is presented as a valuable tool for gaining proactive health insights and creating personalized action plans, which the speaker found personally transformative.

Function didn't just leave me with these numbers. They gave me an actionable plan to address the biomarkers that were out of range.

AI's Economic Impact and Investment Rebalancing [08:51]

• There's a strong belief that AI has saved the US stock market and economy recently, with significant money pouring into the sector.
• However, a counterargument questions how this is being priced in, citing a report that 95% of organizations found zero return on generative AI investments despite spending $30 billion to $40 billion.
• AI is not yet consistently profitable for companies, even when implemented for tasks like customer service, compared to human labor.
• While AI saves time in content creation (e.g., reducing scripting time from 10 hours to 7), it's not directly translating into increased revenue for many.
• The speaker is rebalancing their portfolio by moving 25% of their S&P 500 allocation into a mix of an S&P 500 value index fund, midcap stocks, and an international index fund.
• This diversification aims to reduce reliance on US-centric growth and tap into global economic potential.
• Expert recommendations often suggest a 70% US to 30% international investment split.
• International markets, including emerging economies like China and India, are seen as having significant long-term potential.
• The speaker acknowledges their personal investment philosophy is based on hobbyist enthusiasm and not professional advice.

The speaker is actively shifting investment strategy due to concerns about AI's current profitability and the concentrated nature of the S&P 500, opting for broader diversification including international markets.

I feel like by virtue of having a lot of my money in the S&P 500, I am now kind of betting on a big AI future. And that's not a future that I definitely think is going to happen.

The Future of AI and Investment Speculation [13:05]

• The current AI boom might be speculative, and the speaker remains unconvinced about the near-term arrival of Artificial General Intelligence (AGI) or its immediate economic benefits to controlling companies.
• The risk-reward ratio for AI investments is viewed as potentially unfavorable, with high risk for uncertain rewards.
• Moving money into international markets and other asset classes is a strategy to reduce volatility and diversify away from AI-centric bets.
• AI's significant energy consumption is driving up energy costs and benefiting energy stocks and data centers.
• However, if AI becomes more efficient or its growth slows, the energy demand may decrease, impacting these sectors.
• AI is primarily seen as a tool for enhancing efficiency and simplifying tasks rather than a complete job replacement, though some manual tasks (like taking fast-food orders) are being automated.
• While AI will likely evolve to handle more complex roles (e.g., in law or accounting), this is not expected in the immediate future.
• The market may be pricing in a future where AI automates many professional tasks, but current trust levels are not yet at that point.
• The unpredictable nature of future AI advancements means diversification and long-term holding remain prudent strategies.
• The speaker emphasizes that if AI truly revolutionizes industries, new companies will emerge, potentially shifting market leadership.

The speaker views the current AI enthusiasm as potentially speculative, advocating for a diversified, long-term investment approach that accounts for the uncertain economic impact of AI and the potential for unforeseen technological advancements.

I think that these giant companies providing the AI models will actually be competing with each other for those customers.

Portfolio Rebalancing and Diversification Strategy [18:06]

• The speaker is implementing a new investment strategy, moving away from heavily investing in the S&P 500.
• Previously, a larger portion of funds went into the S&P 500; now, a smaller amount is invested regularly.
• The remaining funds are being allocated to emerging markets, international index funds, and a Bitcoin ETF.
• The portfolio allocation is shifting from approximately 80% in the S&P 500 to about 40% S&P 500, with the other 60% split between the Bitcoin ETF, international, and emerging markets.
• This strategy avoids selling existing holdings and focuses on consistently buying smaller positions to increase their proportion over time and rebalance the portfolio.
• The goal is to achieve better ratios and reduce concentration risk, particularly in AI-related stocks and the US market.
• The speaker reiterates the importance of taking proactive health measures, referencing Function Health and its role in inspiring lifestyle changes.

The speaker is actively diversifying their investment portfolio by shifting capital away from a heavily concentrated S&P 500 into international markets, emerging companies, and Bitcoin, while also emphasizing proactive personal health management.

So, I am pretty heavily invested in the S&P 500 but going forward and I really have been doing this um for the last like few months is that instead of investing a larger amount in the S&P 500 I'm investing a smaller amount on a regular basis but then I'm putting the difference into emerging markets and international uh and a little bit of a Bitcoin ETF at the same time.