Introduction to Bull Markets
As we find ourselves deep into a Bull Market, the excitement is palpable. The thrill of watching markets hit new highs often leads to a sense of urgency among investors. This environment creates a perfect storm for making hasty decisions. Investors are tempted to increase their stock allocations, chasing the highs of the market. In many cases, the Bull Market hides this mistake for a while, and the investor enjoys good returns for a period. However, it’s crucial to remember that while Bull Markets can last for several years, they don’t last forever.
Unveiling The Investment Myth
The excitement of Bull Markets often opens the door for investment myths to flourish. Many sellers are quick to exploit investor enthusiasm by offering strategies that promise both high returns and protection against losses. These alluring strategies are built on the false promise of a perfect investment approach. The truth is, such a foolproof strategy doesn’t exist. Sellers capitalize on the momentum of the market, presenting ideas that seem too good to be true. It’s vital to remain cautious and not fall for these myths, as they often lead to regret when the market eventually shifts.
Winning the Stock Market Game
To succeed in the stock market, you must create a well-diversified portfolio that has the appropriate amount of stock to stay ahead of inflation, balanced with the appropriate amount of bonds and cash to protect you against severe market drops. Then you must hold on to that portfolio through thick and thin, and only make changes if your investment objectives change, not if the market changes, because it will.
This approach does not mean you are “doing nothing.” You should be systematically “rebalancing” your portfolio when circumstances dictate. To be done correctly, rebalancing should be an automated process that removes human emotion. In the case of a Bull Market, this means trimming stocks and adding to bonds, so that you are prepared for potential downturns.
Perhaps the most important factor that makes this type of portfolio construction work is your portfolio allocation (% of stocks, % of bonds, % of cash), as statistics have demonstrated repeatedly that allocation has a significant impact on your investment returns. Let’s be clear, the proper allocation, coupled with regular rebalancing, does not mean you will be spared from portfolio losses during poorly performing markets. However, the goal is to limit your downside so that you never lose more than you can handle.
A trade-off of this downside protection is that you won’t see sky-high gains, but you’ll participate in market upsides enough to meet your financial goals.
The graphic below shows a simplified example of how the proper allocation should work in your portfolio:
Resisting Temptations
Purveyors of great new investment ideas will argue that the above approach is outdated, overly conservative, and too simplistic. They will lead you to believe that they have figured out a new angle of some sort, and during Bull Markets it’s easy to get caught up in the excitement and make impulsive decisions. In fact, about 66% of investors have admitted to making an emotional investing decision they later regretted.
The only way to consistently overcome the temptation is by having FAITH in what has worked over the long-term rather than chasing short-term fads. Faith that a well-diversified portfolio, rebalanced regularly, with the proper allocation should help you achieve the highest rate of return for the least amount of risk.
Faith in Investing
Faith is composed of two parts:
- Belief, and
- Trust
Belief is the easy part.
- Most investors believe they own good investments.
- Otherwise, they would not have invested in them!
But trust…now that’s the hard part.
- Trust means that you can hold onto that well-designed portfolio when it seems there is no hope the markets will ever stop falling, and more importantly,
- It means holding true to that same portfolio when markets are rising, and it seems your portfolio should be doing better.
Bull Markets are notorious for breaking trust in the latter case.
Your only defense against the great new investment ideas is to trust in what has historically always worked, which is a portfolio that allows you to capture your fair share of the global market returns, designed to be held forever, and built to limit your losses during market declines. Doing what has historically worked doesn’t guarantee it will continue to work forever, but the odds are infinitely better than trying what has not worked before.
It’s a pity to see how frequently many investors have faith on their lips and yet how sparingly they put it into their actions!
True faith is not just a belief held internally but is demonstrated through actions that align with those beliefs. Thus, faith is a behavioral act, not an investment fad!!!
Debunking Active Investing
The idea of actively picking stocks to consistently beat the market is a pervasive myth that can lead investors astray. Research has shown that the vast majority of actively managed mutual funds fail to outperform their benchmark indices over extended periods. For instance, fewer than 10% of active U.S. stock funds managed to surpass their benchmarks over a 20-year span. This isn’t just a U.S. phenomenon; it holds true globally.
Despite the allure of active investing, especially during Bull Markets, the data clearly favors a passive, diversified approach. Active strategies often involve higher fees and increased trading, which can erode returns over time. Rather than attempting to outsmart the market, a more effective strategy is to create a balanced, diversified portfolio that aligns with your financial goals and risk tolerance. This approach not only reduces costs but also minimizes the emotional stress associated with trying to time the market or pick individual stocks.
Role of Financial Advisors
Financial advisors provide essential guidance, especially during Bull Markets when emotions can cloud judgment. They offer historical context on market trends and help you construct a resilient portfolio tailored to your specific needs. By focusing on systematic and emotionless rebalancing, advisors ensure your portfolio remains aligned with your goals, automatically buying low and selling high. This disciplined approach minimizes the risks associated with impulsive decisions driven by market euphoria.
An advisor’s expertise can be invaluable in maintaining a balanced asset allocation, crucial for long-term success. Additionally, they can offer personalized advice on retirement planning, address concerns about financial security, and help you navigate complex income strategies. Their objective perspective can keep you grounded, preventing costly mistakes and helping you stay committed to a well-thought-out investment strategy.
Conclusion: Staying True to Proven Strategies
The allure of finding the perfect investment strategy can be strong, especially during the excitement of a Bull Market. We all want to find some system to pick the right stocks and bonds, build a portfolio that hits the lights out during the good times, and does not lose any money when markets crash. Unfortunately, no such system exists. History has shown that the most reliable way to achieve your financial goals is to stick to a well-diversified portfolio with proper allocation and regular rebalancing.
Then, you have to do the hard part – you have to hold fast during all the bad times, and all the good times.
It may sound boring:
- In fact, it is against our very nature not to “do something” when the investment environment seems to change.
- But that is exactly what you must do to make your portfolio work, and that is how successful, long-term investing is done.
- It is all about behavior!!!
Remember: Investing is less about the TYPE of investments you own, and more about TYPE of investor you are!
- Don’t be fooled by great new ideas.
- Go with what has worked historically.
