Bull markets are way more fun than bear markets but they can also warp your brain.
Here are 9 questions I’m pondering at the moment in one of the great bull markets of my lifetime:
1. What if I’m not as smart as I think I am? During a bull market it begins to feel like everything you touch turns to gold. Bull markets can make you feel like a genius (just like bear markets make you feel like an idiot).
It’s important to remain humble the more the markets go your way.
2. What am I wrong about that I currently believe with certainty? I’m not 100% certain about too many things when it comes to markets and investing.
But there are certain things I am fairly confident about right now that will likely prove to be wrong in the future. This is just the way things work in the markets.
Some people think crypto is going to change the world forever. Others assume it’s a joke that’s destined to fail.
Some people think interest rates will eventually scream higher from here. Others assume low rates are here to stay.
Some people are positive we’re in one of history’s great bubbles. Others assume this time really is different in many ways.
Something you feel strongly about right now is going to look silly in the future.
It’s important to keep an open mind about what could happen in the markets.
3. What will look obvious with the benefit of hindsight? It seems obvious now that stocks should have rallied furiously following the pandemic crash.
The Fed threw the kitchen sink at the credit markets, people got checks from the government, unemployment benefits more than made up for lost wages and degenerate gamblers had nothing better to do with their time than invest.
Of course the stock market is higher!
But a doubling of the stock market in 15 months wasn’t on anyone’s radar in March or April of 2020. Most people thought it was only a matter of time before new lows were made.
If the stock market continues to charge higher it will seem obvious in hindsight
If the stock market falls out of bed it will seem obvious in hindsight.
If inflation is transitory or remains high or falls somewhere in between it will seem obvious in hindsight.
It’s important to remember the past is clean while the future is a mess.
4. Do I have a plan or a portfolio? There is a huge difference between holding a handful of investments and an actual investment plan.
A portfolio involves buying securities, funds and other types of investments. A plan involves creating a decision-making framework to guide your actions.
You can do just fine for yourself with a portfolio of investments when things are going well.
It’s important to remember that a portfolio doesn’t help all that much if you don’t have a plan when things get harder in the markets.
5. Am I making good decisions or just getting lucky? There is nothing wrong with getting lucky in the markets. Businesses still accept money made by luck.
But luck is not a repeatable process.
It’s important to be honest with yourself about where your performance is coming from during a bull market.
6. How did I react during past downturns? Past performance is not indicative of future results but past behavior is a pretty good barometer of future behavior.
Did you bail out in March 2020? Did you want to bail out? Did you buy? Did you stand pat? Did you rebalance?
It’s important to take inventory of your past behavior during turbulent markets because it’s a decent approximation of how you’ll react the next time around.
7. How disciplined is my investment approach? During bull markets it feels foolish to sell anything. During bear markets it feels foolish to buy anything.
Discipline and risk management feel worthless when stocks seemingly do nothing but go up.
It’s important to remember you can’t just be disciplined when you feel like it.
8. Is my portfolio durable enough to handle a variety of market environments? A portfolio that’s positioned exclusively for bull markets will probably do just fine the majority of the time.
But you still have to prepare for the eventual correction or bear market.
It’s important to remember markets don’t always go up.
9. What is my plan for the next downturn? The Corona crash was over so fast, most investors who weren’t prepared for it were offered a mulligan.
It wasn’t some drawn-out bear market like the 2008 crash that took years to recover from. Investors were made whole in a hurry. Quick gains can paper over a lack of investment planning.
Maybe extended bear markets are a thing of the past but you have to account for market downturns no matter how long they last.
I’ve talked to a number of investors that had no idea what to do during the crash because they didn’t have a plan ahead of time. Even a subpar plan is better than no plan.
It’s important to prepare for a wide range of market outcomes, both good and bad.
10 Bear Market Truths