Investing in bullish markets

Ben Carlson reminds us on his blog that regardless of the start date, this bull market in US equities has been relentless. Agreeing on the start date may be semantics, but we can all agree that pinpointing when it ends is impossible to do in advance. Until that day comes, here are some reminders about investing during bull markets.

Bull markets make you feel smarter the general direction of the market can toy with emotions by magnifying how we feel about our investing abilities. When stocks are going up it can make you feel like a genius just as when stocks are going down it can make you feel inept. Legendary investor Bernard Baruch offered some advice on this point: “Become more humble as the market goes your way.” Confusing brains with a bull market can be a costly mistake because bear markets don’t care how well you did when markets were going up.

Two things to remember Bull markets can last longer than you imagine. Secondly, even bull markets aren’t easy. They don’t keep going up in one direction. There can be a significant decline in share prices before the bullishness returns testing an investor’s patience and resolve.

Bull markets can lull investors to sleep Bull and bear market volatility in the stock market tends to look very different. You would assume bull markets are overflowing with big up days while bear markets consist of mainly big down days but that’s typically not how it works. Bear markets are full of both big down and big up days as volatility tends to cluster. When markets are going down volatility goes up, but it does so in both directions. Bull markets, on the other hand, are slow and methodical.

The methodical nature of bull markets is one of the biggest reasons we see overreactions during the inevitable bear market to follow. Markets that slowly go up blind investors to the fact that sometimes they also go down. And those overreactions are amplified by the fact that no one knows how long the music will continue to play.

Carlson advises investors to enjoy the bull market while it lasts. Just know it will take a pause at some point and when that happens many investors will sell first and ask questions later.