“Officers wanted for hazardous journey. Small Wages. Bitter cold. Long months of complete darkness. Constant danger. Safe return doubtful. Honor and recognition in case of success.”
--from a recruiting poster by British explorer Ernest Shackleton
for his 1914 Antarctica expedition
We’ve spent a lot of time talking about cautious investing recently, and while it’s always a worthwhile endeavor to hope for the best but prepare for the worst, in the fetal position isn’t quite where we want to be. The fact is that there has never been a risk-free way to earn solid returns in the markets, and that’s more true than ever today with interest rates where they are.
We all know that investors have to accept some risk. Of course, many investors are currently embracing risk along with the most absurd return expectations I’ve ever seen-- essentially signing on to Shackleton’s expedition in truly gung-ho fashion-- but experienced investors know that it’s rarely wise to go entirely all-in (or all-out) on anything, whether it’s stocks or bonds or gold or real estate or whatever. There might be times where you underweight or overweight a particular asset class based on various criteria, but every investor should have a statistically quantifiable financial plan and recognize that deviating too terribly much from it is typically foolhardy. …At best.
Plus, we all know what happens when you mess with the wrong bull: you get the horns.
With that in mind, we’ll now discuss the flip side of preparing for bear markets and talk about preparing for a bull market. I was president of my debate club in college; I can do this.
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Yes, yes, bull market, I said it. I know valuations are high. Like, super-high. Like, the U.S. stock market is currently valued at more than 205% of the last reported GDP. (Unheard of? Yup.) And there are now more realtors than home listings. And I’m fully aware that the past 16 months sent our economy into convulsions that have resulted in a crazy orgy of excess and speculation in certain markets. …But bull markets can last longer than you think.
Frankly, it’s a bit hard to wrap my head around the idea that this bull market could still have a number of years to run, but stranger things have happened. I’m not saying it’s going to happen, just that it could. Therefore, since we’ve recently provided ample commentary about how (and why) to prepare for a bear market, we’ll now provide insights about how to better prepare for a bull market.
It’s not as easy at it sounds. On any given day-- even during robust bull markets-- there are plenty of reasons to be fearful and to flee to the perceived safety of cash. It doesn’t help that shouting about some impending Crash with a capital C helps market pundits to sell books about investing, online trading courses and financial newsletters. (And anti-depressants.)
There’s literally some doom and gloom going into print every day for that reason.
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But scaring people into buying something is a cheap trick. Investors who do the following things won’t fall for it:
Set your intention. One of the worst parts about bull markets is seeing others take irrational risks and make more money than you. It’s difficult to stay satisfied when you see otherworldly returns being made elsewhere.
The best way to avoid FOMO is for you and your advisor to agree on filters to define what you will and won’t invest in. If you have a specific set of strategies, asset classes and securities with which you’re comfortable, it will be easier to say no to everything else, regardless of how much money others are making.
Seek balance. If you wish to earn high returns in the stock market, it follows that you can’t get scared out of stocks when volatility inevitably occurs. Of course, holding on during a bull market can be difficult. The longer the gains last, the more tempting it is to try to time the market.
The simplest way to stay invested is to create an asset allocation that you would be willing and able to hold during both bull markets and bear markets alike. The whole point of diversification is to moderate various market and economic conditions with balance.
While rebalancing isn’t as sexy as calling tops and bottoms, it’s much more useful because it allows you to stay invested, occasionally take profits in your outperforming asset classes and buy your underperforming asset classes, and manage risk along the way.
Stay within yourself. A combination of FOMO and greed can make people do really stupid stuff with their money during a bull market. It’s important to avoid unnecessary mistakes.
Things that have never happened before seem to be happening all the time these days, but I still think that if it sounds too good to be true, it probably is. Have a plan, and stick to it.
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We’ve added a lot of new readers to Insights over the last few weeks, and I’d like to encourage you all to visit the RG website in order to put this particular column into perspective. As you'll see, we’ve made some great calls recently on everything from commodities to value stocks to private credit and structured products, and while we endeavor to prepare clients for all sorts of market conditions, we’re not exactly super-bullish right now. So, do please give it a look, and as always, let me know if you have any questions whatsoever.
For disclosure information please visit: https://www.rgbarinvestmentgroup.com/terms-and-conditions
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