Speculation or Investment: It Seems Now the Distinction Is in the Eye of the Beholder

There’s a new sport on Wall Street, and it’s not for the faint of heart.  It’s fast, it’s flashy, and it might just be foreshadowing an upcoming “pop”.  Did someone say bubble?  Not me.  Also, I think I have to state outright that comparisons that are starting to gain some traction being made between today’s market and the internet bubble 25+ years ago are a bit off the mark.  Keep in mind, the Internet bubble was a result (at least in part) of the fact that many of the stocks that were being touted at that time as can’t miss investments had no earnings!  In fact, I even recall one company going public with no revenue!?  Today’s market, by contrast, is led by companies that are certainly trading at high valuations (relative to historic metrics) but they are also real companies making real money.

Let me pick back up on the title of this week’s piece – the speculation vs. investment comparison.  Our research tells us that a stunning 672 new ETFs have launched so far in 2025.  Nearly 28% are tied to a single stock, and 25% are leveraged, meaning they don’t just follow the market—they try to amplify its daily movements (1).  Want to double the daily gains—or losses—of some obscure biotech stock with a market cap smaller than your neighborhood coffee shop’s annual revenue?  There’s an ETF for that.  Craving the roller coaster of crypto, but with even more vertical drops?  At least three ETFs now double the daily performance of cryptocurrencies, because, you know, Bitcoin wasn’t exciting enough already.  But wait—there’s more.  While these hyperactive ETFs are sprinting through the markets, a different form of turbo-trading is also taking hold.  Retail traders (another name for your neighbor who watches CNBC on one screen and TikTok on the other) now make up about 50% of daily trading volume in “zero-day” options—those ultra-short-term bets that expire the same day they’re bought.  These used to be almost entirely the domain of hedge funds trying to generate huge returns (at similarly huge risk).  Many of these “zero-day” options are held for mere seconds (2). Market history offers a useful warning:  when new products (which implies marketing driven more than client need driven) are launched in large number, complexity increases, and short-term speculation dominates the headlines, it’s often (not always, but often) a sign that the market is getting ahead of itself.  By way of some perspective… let’s rewind the tape:

• In the late 1990s, the dot-com boom brought a surge of internet and tech-focused funds, many of which (as mentioned above) held pre-revenue companies.  Between March 2000 and October 2002, the NASDAQ Composite fell nearly 78% from its peak, wiping out trillions in market value (3).
• In the mid-2000s, the rapid growth of mortgage-backed securities (MBS) and complex collateralized debt obligations (CDOs)—backed by subprime loans—helped fuel the housing bubble.  By 2008, the collapse of these markets played a central role in triggering the Global Financial Crisis (4).
• During the 2020–2021 SPAC boom, more than 600 SPACs went public in just two years.  These special purpose acquisition companies (SPACS) were being marketed by celebrities and public figures and offered unparalleled access and opportunity.  Many merged with pre-revenue companies in electric vehicles, space tech, and fintech. By late 2023, more than 60% of post-merger SPACs were trading below their $10 IPO price (5).

Each of these episodes shared a common thread: a surge in speculative products, detached from fundamentals, fueled by easy money and overconfidence.

So, how should thoughtful investors interpret today’s market climate, and what adjustments—if any—should be made?  Below are a few things to think about (we do!)

Reevaluate Asset Allocation

In an environment full of short-term speculation and volatility amplification, a well-structured asset allocation becomes your shock absorber.  Consider the following:

• Rebalance the account (if tax implications allow).  If equities—especially high-growth or speculative sectors—have outpaced the rest of your portfolio, it may be time to trim and reallocate toward more steady assets like high-quality bonds or dividend-paying stocks.
• Increase exposure to “real” assets.  In speculative cycles, infrastructure investments, real estate, or commodities can serve as a hedge against market froth and inflation.  In our view this typically means equities that focus in these areas and not direct commodity ownership.
• Consider alternatives.  Options strategies that can hedge markets (and generate income), private credit opportunities, and other non-correlated strategies may provide diversification benefits when traditional markets are driven by sentiment.

Stay Long-Term Focused

The average holding period for U.S. stocks has declined dramatically—from an average of 7 years in the 1960s to an average of 5.5 months by the 2020s (6).  Let that statistic settle in as it is quite significant.  In fairness, part (maybe even much) of that is due to accessibility and structural changes to trading, but still a stark shift.  That erosion in patience underscores the growing emphasis on speed over strategy.  Long-term investing can be less satisfying to your endorphins, but often more satisfying to your sleep cycle.

Be Skeptical of Complexity (and Bold Marketing)

When a financial product is difficult to understand or promises extraordinary returns with no clear risks, proceed with caution.  Complexity often hides fragility and fancy marketing is designed to “close the sale” not help a client make a decision that matches their long-term goals.

Use Speculation Sparingly—If At All

Speculative tools like zero-day options or leveraged ETFs may have their place—for some—as high-risk, tactical trades.  And, if you are prone to trips to Las Vegas or jumping out of planes (with a parachute attached to you) might I suggest THOSE are the activities that should generate excitement… not your retirement account.  But if you feel the need for speed (or exciting swings for the fences) let me just say that those trades should not crowd out the disciplined core of your portfolio.

Markets can move in directions that are difficult to predict.  Additionally, measurements and metrics that have made sense for decades (or longer) may be out of favor/fashion.  But, while history certainly does not always repeat itself, there are ebbs and flows that suggest lessons can be learned from past events.  Applying those lessons can be important.   And, while we may not be in a full-blown bubble just yet— it might be the case that the soap is out, the tub is filling, and the loofa is on standby.  Okay, full confession… not a bath guy, but I think those phrases make sense for those with a deeper expertise on the subject.

The explosion of complex, speculative products and the rush of retail traders into ultra-short-term “bets” are classic late-cycle behaviors.  Late-cycle meaning near the end of this bull market.  As the old saying goes, when your cabbie (uh, Uber driver) starts giving stock tips, it’s time to get out of the market.  Today, it might be the TikTok trader with zero-day options and a crypto-leveraged ETF.  If you are looking to avoid the speculation and focus on long term asset allocation and own a portfolio grounded in a strategy that matches your goals, East Franklin Capital is here to help you navigate through noise and focus on strategies that stand the test of time.  Not to stand the test of the month or even the year, but a long-term test.