What the most bullish of bull markets has taught us
As published in the Minneapolis Star Tribune 9/15/18.
It’s official. The current stock rally that began in March 2009 is now the longest bull market in history.
In that time, the S&P 500 and Dow Jones industrial average have both quadrupled, averaging returns in the neighborhood of 17 percent per year.
Statistically, this could be a once-in-a-lifetime investment cycle (and it isn’t over yet), so it makes sense to review some lessons investors can learn from an unprecedented period of stock market success.
Lesson 1: Ignore the doomsday predictions. The most outrageous forecasts are the ones that get bigger headlines and more internet clicks. Media personalities have an incentive to talk big, but that doesn’t mean the opinions are valuable.
Lesson 2: Don’t put too much weight on political elections. Presidents and politicians have far less impact on the stock market than most people expect. Economic conditions and corporate earnings drive markets over the long term. Further, whatever your political leanings, do your best to ignore them. When it comes to investment decisions, we should all consider ourselves independent.
Lesson 3: Stay diversified. It’s always tempting to concentrate investments in a few stocks or a few sectors, but doing so increases volatility and makes it more difficult to stay committed over the long term. Sure, you could have outperformed by investing exclusively into FANG stocks. But limiting your bets could just have easily resulted in owning General Electric, Exxon Mobil, or General Mills, traditional bellwether stocks that have underperformed the S&P 500 significantly. If the major indexes can get you nearly 20 percent per year while staying diversified, why risk it?
Lesson 4: Volatility creates opportunity. This bull market has provided only four 10 percent corrections in the S&P 500. Each time, people wondered whether it was the beginning of the end. And each time proved, in hindsight, to be an attractive buying opportunity. In other words, don’t fear the negative moves. Embrace them.
Lesson 5: Stay invested at all costs. Every year this bull market continues creates another chance to get out having made (hopefully) a sizable profit. The problem is people made that same argument in 2011 after the S&P had doubled off its low, and in 2014 after it had tripled. No one knows when this run will end, but by maintaining an appropriate amount of equity exposure, you are putting the odds in your favor.