I Have Experience My First Bull Market, Now What?
I realized that this is the first bull market that I have experienced in my investing career. Since 2006 I have had money invested on Wall Street in one form or another, but never deliberately. I never had a long-term plan with my investments. I never truly grasped the concept of investing long-term – meaning, having to deal with short-term downturns.
It wasn’t until 2012 when I decided to take index-investing seriously and adopt it as my main monetary strategy. I use the term monetary because my biggest investment has been and will continue to be myself.
What’s A Bull Market
In this post I’m focusing mostly on Wall Street investments, the strategy which I am using to invest my money. I am mostly positioned in index funds, they make sense to me and they require very little effort.
Index funds are an aggregate of funds bunched into one single fund. A single index fund may have thousands of companies that it’s invested in, or it might be focused on a specific sector such as technology or health.
When the economy is doing well then these funds go up in price, this phenomenon is called a bull market. During such times it’s common to see a lot of positive talk about stocks and bonds.
The media will talk about how ‘the Dow is up’ and shows graphs which are trending up. Your portfolio which was $500k a year ago, might suddenly be worth $700k. You will hear a lot of talk of comparing your portfolio to the S&P 500.
What Isn’t Discussed During A Bull Market
When things are doing well then we erroneously assume and expect for the trend to continue. It’s perfectly normal human behavior to avoid negative thinking – why would you think about something bad happening when everything appears to be going well?
You won’t hear talking heads on TV talking about how great a certain industry is doing, heralding a soon-to-come correction or crash.
Even worse, a lot of speculations pop up about why certain industries are doing well. The housing market will be said to be doing well because more jobs are created and more businesses being established in certain neighborhoods.
Very few groups will try to prepare you for a downturn of the economy when this economy is flourishing. Even your financial adviser won’t email you and say: “Hey Dr. Mo, it’s time we talk about what you should do when your funds start taking a dive”.
The Danger Of A Bull Market
A bull market isn’t dangerous – I’m just being dramatic when I use the word “dangerous”, but a bull market can reinforce certain emotions which, if unchecked, can lead you to make big mistakes with your investments.
When an up-trending portfolio becomes the norm, we don’t prepare ourselves for the eventual down-trend. Finally, when our investments tank, we assume that something bad is happening. Even worse, we think that we need to act.
This last part has caused me to make many mistakes in the past. When I was invested in mutual funds and individual stocks back in 2006, I started selling my investments when shit hit the fan and everything started tanking. By doing so, I locked in some major losses.
Focus On Your Investment Strategy
I know that these index funds which have done quite well the past 4 years, will eventually drop in value, plateau and perhaps trend even lower than their historical lows.
What matters is my investment strategy, the concept behind why I am spending my hard-earned dollars buying shares of companies which I know very little about.
Whatever strategy you choose has to make sense to you. My indexing strategy tells me that whenever my funds have gone on a wild run, they will soon trend down. I know that historically, after any bull market comes a bear market.
If I can stay focused and not get swayed by talking heads on TV and avoid the sensationalists, then I will come out ahead in the long-run.
My strategy tells me that when a bull-market occurs, I will have the opportunity to buy the same sound investment at a lower price. All the while, I get to still have some passive dividend income which I can reinvest back into my index funds.
I Don’t Know How I Will React
I only started taking this indexing strategy seriously in 2012. Up until this time I have always bought high and sold low – until 2012 I have consistently locked in my losses.
The great advantage that I have is that I have a financial adviser whom I trust. I try to make it a habit to discuss all my major financial decisions with him, especially when it comes to buying and selling investments.
It doesn’t mean that Andrew can predict the future, nor is he a hedge fund manager. But he can prevent me from making major mistakes, he can encourage me to keep the course. The biggest profits from a financial adviser isn’t how much they can return on your investments, it’s the big mistakes they can prevent you from making.
The other advantage in my favor is that I don’t need my investments anytime soon. I can ride out quite a few bear markets and market crashes until the day comes when I am no longer able to work and earn an income. When that time comes I will need to be much more conservative – I doubt I would have my investments in funds which are at the whim of the market.
How To Prepare For A Bear Market
A bear market is a term used to describe a stagnant economy. Usually it takes place after a good run and either the value of your Wall Street investments drop or they just stay stagnant for a long period of time.
My index fund investments are currently hovering around $500k and my paid-off condo is valued at around $200k. This is a net worth of around $700k.
I can prepare myself for a downturn by playing out some scenarios in vitro. Let’s say my funds take a 20% dip, that would set them at around $400k. They might drop down as much 40%, that would put them at around $300k.
My condo’s value, which is way too high for Portland, could drop around 25%, which would put it at around $150k.
So, within a few days/weeks, I could find my net worth going from $700k to around $450k. I actually try to visualize this, which might seem odd to some, but I picture pulling up one of my aggregate online account apps and I picture that $700k number disappearing and showing $450k, instead.
How would I feel about such a drop? I’d be okay. I’d remind myself that I have no use for this money right now. I would evaluate whether my investment strategy is still sound, which it likely will be. If so, I would continue investing, with the positive mindset that I am now able to buy the same funds for a lower price.