Playing the Current Bull Market

How to Invest Before the Tide Turns

Playing the Current Bull Market
December 23, 2014

The U.S. stock market is in the midst of one of the longest sustained bull runs in history. On March 9, 2009, the S&P 500 index fell to 756, a 57 percent drop from its previous high in 2007. Since then it has nearly tripled, closing at 2,202 on December 12, 2014. The Dow Jones Industrial Average is enjoying a similar romp, from 6,495 to 17,281 during this span. And the champion bull is clearly the NASDAQ Composite Index, which has surged from 1,268 to 4,682 — a 369% rise — during this remarkable run.

At 67 months and counting, this is now the longest bull market run in 85 years. History has shown that bull markets do not go on forever, so some investors are starting to worry about an eventual market correction and reversal.

What Is Your Play?

How should you play this historically long-running bull market? Is it time to cash in some of your chips by selling stocks, booking gains and reducing your stock market exposure to guard against a potentially sharp downturn? On the other hand, should you hold steady and maintain, or even increase, your stock holdings?

Here are five investing strategies to consider as you plan for moving forward in the current market environment:

  1. Now might be a good time to rebalance your portfolio. Big stock market moves, on either the upside or the downside, can disrupt the balance of stocks, bonds and cash equivalents in your portfolio. When this occurs, it is usually a good idea to rebalance your portfolio by selling assets in classes that are over-weighted and using the proceeds to buy assets in classes that are underweighted.

    For example, suppose your target asset allocation is 50 percent stocks, 40 percent bonds and 10 percent cash. But the bull market has increased the value of your stock holdings and shifted the balance of your portfolio to 60 percent stocks, 35 percent bonds and 5 percent cash. You could bring your portfolio back into balance by selling 10 percent of your stock positions and using the proceeds to buy the appropriate percentages of bonds and cash equivalents.

  2. Remember the importance of diversification. The old adage “don’t put all of your eggs in one basket” is especially true when it comes to stock market investing. There are many different stock market segments you can invest in — large-, mid- and small-cap stocks; international and emerging markets; and specific industry sectors like financials, consumer discretionaries and technology are just a few. By spreading your stock market investments out among several of these different segments, you can lessen your exposure to a stock market correction.

  3. Consider your investing timeframe when formulating your strategy. How long will it be until you need to access the money in your portfolio? The answer to this question should be one of the driving factors in how you play the bull market.

    If you will need the money in the relatively near future — say, within the next five years — it might be smart to lock in some stock market gains by selling some winners now. The bull could continue to run, but you will at least protect yourself from a possible sharp downturn if it does not. However, if you have a longer investing timeframe, then it might be safer to stay in stocks. Even if the market does experience a correction, you will have more time to ride out the bear and make up the losses when the next bull market begins.

  4. Keep a close eye on investor sentiment. One indicator that a bull market may finally be coming to an end is when everyone seems to think just the opposite: That we have entered a new paradigm or a “new normal” where market cycles no longer exist and stocks just keep going higher and higher. At this stage, investor sentiment will soar as even investors who have been sitting on the sidelines throughout the bull run decide to jump into the market. When you sense this happening, it might be a good time to consider reducing your stock exposure.

  5. Be careful when listening to what all the “experts” have to say. Finally, you should use discernment when it comes to all the opinions that are bandied about with regard to when the bull market will supposedly end. Cable TV, radio and the Internet offer an unlimited variety of supposed stock market experts, each of whom claims to know the secret to timing the stock market to maximize gain and minimize risk exposure.

    The truth is that no one knows when this bull market run will end. For every market “expert” who predicts that stocks will continue to rise in the coming months, you can find another expert who predicts just the opposite.
Obvious in Hindsight

Nobody fires a starting gun to mark the beginning of a bull market, or waves a checkered flag to mark the end. In fact, the start and end of bull and bear markets only seem obvious in hindsight. So remember these five strategies to help you make the best decisions about buying and selling stocks for your particular situation.

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