“Become more humble as the market goes your way.” – Bernard Baruch
2013 has been a banner year for the U.S. stock market. The S&P 500 is on track for a total return in excess of 30% this year, its best performance since 1997.
Anyone that has held a decent slug of stocks in their portfolio since 2009 has doubled their money and then some. It hasn’t been easy, but this has been an unbelievable time to be an investor.
Every month you check your portfolio value it seems to go up.
All of the stocks, funds and ETFs that you pick have worked.
After lying in the fetal position and taking kicks to the ribs from the market during the financial crisis you are now landing haymaker after haymaker and winning every round.
This feels great.
Remember this feeling.
It won’t last forever.
You don’t want to become a fair weather fan when it comes to the markets. Hating the stock market when it falls and loving it when it rises is a recipe for disaster because eventually you give into the sentiment at the extremes and make bad choices with your money.
If you’ve stuck it out in stocks it’s OK to take a victory lap and pat yourself on the back. You’ve earned it. But stay humble. The market has a way of humbling those that become overconfident in their investment approach.
It seems everyone turns into a buy and hold investor when the markets are going up and a tactical investor when they are going down. It’s easy to fall into the trap of claiming to be a long term investor in the boom times and a short term investor during the panics.
Many investors gave up on stocks after the last crash. You can see that some of them have decided to come back to the party after fund flows to stocks finally outpaced bonds this year. This comes after four straight years of inflows into bonds and outflows from stocks. This is not an investment plan but an attempt to destroy wealth.
Remember this feeling when the market has a meaningful correction, because one of these days it will happen. It’s what markets do.
Remember how you felt at the depths of the financial crisis in late 2008 and early 2009. If you have a time horizon measured in decades you will likely have a similar feeling in the future.
Stocks fell roughly 20% in the summer of 2011. How did you feel then? Did your investment plan change? Or your tolerance for risk? Or your time horizon?
Ask yourself the same questions now as markets continue to rise.
If you have many years in the workforce ahead of you there is a huge asset on your personal balance sheet called human capital that you can use to accumulate investments. Your future earning power gives you the opportunity to continue to make periodic investments as time passes.
That means you should welcome bear markets and increased volatility in the future instead of being scared for those times.
Future losses sow the seeds for future gains on newly invested capital.
I’m not calling for an end to the bull market. It’s nearly impossible to predict when sentiment will change enough to derail a market run that gets set in motion and taken over by human nature.
As John Templeton once said:
Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.
Any investor with meaningful time in the markets has felt all of these emotions at one time or another. You may be feeling one of them now.
You need to have an optimistic frame of mind to stick it out in the markets over a long time horizon.
But you must also remember the feelings you had when things looked bleak. Having a handle on your emotions is the biggest factor in becoming a successful investor.
Stocks Will Go Down