The Five Year Bull Market and Smart Investing

| April 6, 2014

five year bull marketThe stock market recently celebrated the fifth year of growth since the start of the current bull market. Looking back, there are clear lessons for intelligent investors.

On March 9, 2009, the financial news was universally bad. The Standard & Poor’s 500 stock index had fallen 57% from its 2007 peak; headlines in the Wall Street Journal suggested that the Dow Jones Industrial Average could fall to 5,000; unemployment was reaching towards 10%; and General Motors was on the verge of filing for bankruptcy.

However, that was the day on which the bear market hit its bottom, and started to rebound. The rebound became a comeback, and the comeback became a bull market that has now lasted for more than five years. During this run the S&P 500 has returned more than 200%, and the Dow Jones hit 15,000 for the first time in May, 2013 – and then continued onward to top 16,000 by November.

The current bull market (and the bear market of 2007 to 2009) reinforced the lessons for intelligent, long-term investing. These can be summarized in four key words:

1. Continuity (not Timing): There is no way to tell exactly when the stock market hits a bottom and starts to climb, or hits a high and starts to fall. From the vantage point of history, such points are easily determined, but from day to day it is impossible. During the five years of this bull market, the market has seen the DJIA plunge nearly 1,000 points in a “flash crash” of May 6, 2010, and seen the market plunge hundreds of points when S&P downgraded America’s long term bond rating on August 5, 2011. Either event could have been imagined to be the end of the bull market, but both were just temporary setbacks in the continual climb.

Trying to time the market, to catch its upsides and avoid its downsides, is a fool’s exercise. Investors who panic and sell when the market is falling, or who rush in when the market is climbing, are in effect selling low and buying high. Instead, have a plan and stick to it through successive business cycles.

2. Diversification (not Favorites). It is fine to have one or two favorite investments to follow, but diversification remains the proven method of best participating in the gains and minimizing the losses inherent in the market. Diversification includes holding investments other than equities, with bonds, and fixed income investments included in a healthy portfolio. The best way to achieve this (if you are not sophisticated or do not want to commit the time to following the progress of individual stocks) is through a balanced mutual fund.

Many people misunderstand what it is to be a “conservative” investor. They fear the volatility of the economy and think that being conservative means staying out of the equity market by choosing more “safe” investments. But this approach is really a decision to select only one type of investment (fixed income), and selecting just one type of investment is a very dangerous plan. A more careful and conservative approach is to hold different types of investments, which will mitigate against the swings of the economy.

3. Rebalance (don’t Let it Ride). Large moves in the market can wreck havoc on a balanced, diversified investment plan. An investor with a portfolio of 60% stocks and 40% in bonds at the start of the bear market in 2007 would on March 9, 2009 (the start of the bull market) have had 38% in stocks and 62% in bonds due to severe decline in the equity markets. This would have then deprived him or her of the full benefit of increases of the bull market from 2009 to the present.

Rebalancing is the system of planned selling and buying investments to return your portfolio to the intended ratios. It can be emotionally difficult, as it will mean selling some investments that are doing very well, and buying other that have lagged. But you don’t want to be an emotional investor – you want to be an intelligent investor.

4. Long-Term (not for Current Needs) The stock and bond markets are not the place for money that is needed in the short term or to meet current needs. Over the long term, these markets are stable and predictable; but for the short term they may be very violate. The long term growth prospects are not helpful when you need the money now. Investments ear-marked for needs that will reasonably arise in the next few years should be invested in guaranteed interest savings. The equity and bond markets are for long term investments, when you can take advantage of the long term growth of the economy.

So, what is the stock market going to do next? There are no guarantees. For most of us the best course remains consistent investment into a diversified portfolio, shaped to your personal time horizons and risk tolerance, and not worrying about when the market turns bull or bear.

Finally, always remember that the wealthy should not glory in their wealth, the wise should not glory in their wisdom, and the strong should not glory in their strength. Wealth corrodes, wisdom dims, and strength fades, but he that glories let him glory in this, that he understands and knows me, that I am the LORD who exercises lovingkindness, justice, and righteousness, in the earth: for in these things I delight, says the LORD. Jeremiah 9: 23

Category: Finances