Do Bull Markets Scare You?

A rising market triggers fears.

Does a bull market make you nervous? You would think most investors are more comfortable with gains than losses, but this is not necessarily the case. Paradoxically, a rising market often makes investors fearful — and can lead to some bad investing decisions. Equity markets had an incredible start to the year — the best January in 30 years for the S&P 500. Gains continued almost without pause through the end of June — the best June in 80 years for the Dow Jones Industrial Average. An up-trending market can make many investors nervous though, especially investors with new cash waiting to invest. This unease is normal during unusually dramatic market movements. Here are ways you can benefit from a bull market, without straying from your long-term strategy.

Rebalance your portfolio.

In a bull market, the equity portion of your portfolio has likely grown in outsize proportion to the bond side. For example, if you started out with 50% in bonds and 50% in equities, and your equity holdings doubled in value, you would now have 25% bonds and 75% equities, which would mean more risk in the portfolio. You could use a bullish trend to move some of the money in equities to your bond holdings to restore your 50/50 target mix. Rebalancing feels very counterintuitive because it involves buying “losers” and selling “winners,” so very few individual investors actually do it — despite the long-term benefits of a portfolio with an appropriate amount of risk/return for your needs. (In taxable accounts, look to avoid short-term gains where possible.)

Take advantage of the gains.

Consider adjusting out of the holdings that do not fit your target investment strategy. Perhaps there is an individual stock you have held for years, but does not really fit with the diversified strategy in the rest of your portfolio. Another common problem is mutual funds with overly large distributions that can cause a tax headache. A bull market offers the opportunity to use the sales proceeds from ill-fitting holdings to bring your portfolio into alignment with your desired allocation. Note that with mutual fund sales, you should be aware of dividend/distribution dates for the fund and plan your sales around those.

Keep investing.

Don’t be put off from investing when markets are “at new highs.” Remember, equity markets hit new highs all the time. The S&P 500 had five new highs in 2018, and eight in 2017. There are historic positive and negative days often. Certainly a goal should be to invest at value, and to purchase at a discount when possible. But holding excess amounts in cash only guarantees low returns unlikely to keep up with inflation. You also guarantee that you will not participate in future market returns, dividends or interest. Saving on a regular basis is another way to be proactive — and automatically increase your return. This includes maxing out your tax-deferred retirement contributions, as well as contributing to after-tax accounts. Both contribute to your future security.

Have a system.

People often worry about investing large sums at the top of the market. If you have a large lump sum of new cash and markets appear to be overvalued, investing on a gradual schedule makes sense. The effect of this system, called dollar-cost averaging, is that if you purchase a set dollar amount each month (or whatever time period makes sense), then you will buy more shares when the prices are undervalued and fewer shares when they are overvalued. Take advantage of dollar-cost averaging and adjust into various market segments over time.

Avoid market timing.

Remember, the best time to invest is always now! Equity markets do not go up in a straight line, but over a long period of time, they have historically gone up. With better information, investors are abandoning funds that rely on stock-picking and market-timing strategies. Prior to the internet, it was difficult to compare fund performance — but now investors can easily see how unsuccessful active managers are at beating their indexes. Over 90% of actively managed mutual funds failed to beat the market over a 15-year period. Target-date funds that participated in market timing underperformed their peers by 0.14% each year. There is a better chance of winning at blackjack when you “hit” on two face cards (8%) than beating the market (4%).

Put the deck in your favor.

You cannot control the bullish or bearish trend of markets, but there are a number of things you can control to stack the investment deck in your favor. Avoid investment commissions, keep portfolio expenses to low institutional levels, use tax efficient strategies, and hold the proper types of assets in the proper types of accounts. And remember, “the market” is not the same thing as “your portfolio.” So if the bullish trend gives you pause, remember it is never a bad day to invest in your future wealth.

Steps you can take to benefit from a bull market:

— Rebalance.

— Take advantage of the gains.

— Keep investing.

— Have a system.

— Avoid market timing.

— Put the deck in your favor.

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