Inevitably, as a long bull market for stocks grinds on, investors begin to wonder: How long will it last?
A bull market is usually defined not by a specific time period but in restrospect. Only when stocks falter, either as a short-term correction or a longer bear market, do investors look back.
It becomes easy over time to pick out those stretches of rising stock valuations and say, “Aha, there’s the bull market!” It also becomes easier to come up with reasons why stocks kept going up.
The government was controlled by one party or another. Interest rates were falling or rising. Corporate tax rates were lower than usual or higher than usual.
The problem with all of this backward analysis is that it isn’t applicable to the future at all. The reasons behind a sustained rise in stock valuations are varied and extremely difficult to undertand.
Yes, rising corporate earnings matter. So does a relatively low interest rate, all things being equal. But it’s rarely the case that all things are equal. Foreign conflicts arise. Congressional power abruptly changes hands.
Strange things happen, such as bank panics and stock crashes, sometimes for truly understandable reasons and sometimes for no immediately obvious reason. Again, we are stuck with looking backward and searching for meaning.
None of this helps with the real problem of investing, which is looking forward with confidence. So, here’s a few actual facts that can provide a frame of reference.
Stocks outpace nearly all other traditional investments. According to J.P. Morgan data, stocks in the S&P 500 over the last 20 years returned 7.7%, gold returned 5.8%, bonds returned 5.3% and cash lost value to inflation of 2.1%.
If owning stocks gives you the jitters, consider that a stock and bond portfolio ended the 20-year period in nearly the same place with less volatility, according to the investment bank.
That is to say, a $100,000 stock-only investment made in October 2007, at the market’s previous peak, fell in value by $50,000 at the March 2009 low.
A 40/60 stock and bond portfolio fell too, but recovered it’s previous valuation by November 2009. The 60/40 variation recovered by October 2010.
It took until March 2012 for the 100% stock portfolio to fully rebound, but it did. As of December 2016 the stock-only portfolio was slightly ahead of the stock-and-bond variations, but the lessons remains clear: Diversification lowers volatility.
The serious long-term investor should consider these two takeaway:
First, stocks are the engine room of any portfolio. Avoiding them for fear of a decline means giving up the kind of long-term growth you need to compound your money.
Second, if a long bull market gives you a case of the nerves, then a diversified portfolio could the answer. Owning several assets classes and rebalancing them is the key to capturing gains while lowering risk.
Top that off with low-cost index funds, and you have an attractive combination in any market cycle.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.