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Robert M. Cheney, CFA, CFP®



Featured Wealth Management Article

Expand Your Perspective on Bull Markets

by Robert M. Cheney, CFA, CFP® Dated 6/4/2018


In recent months I have increasingly heard from friends and prospects, “I’m sure it is time for a bear market to arrive,” or “I went to all cash because things cannot go on like this,” such that I have felt compelled to write.


Intuition tells us that given a relatively long period of sustained positive performance, as we have experienced 2009 to 2017, we might be due for a bear market.  This instinctive thinking also occurs in baseball, when a batter is “due” for a hit after a prolonged string of hitless at-bats, and in gambling, with the belief that you might be “due” to see the ball land on black after a string of red spins at the roulette wheel.


This Fallacy of the Maturity of Chances (also referred to as the Monte Carlo Fallacy) can result in faulty decision-making which, when left unchecked, adversely impacts the likelihood of investors achieving their long-term goals.


The bear market intuition is also influenced by Recency Bias – that we expect our recent experience to be repeated in the future.  We have experienced two bull markets in the 1990s and 2000s that lasted nine and five calendar years respectively and were then followed by severe bear markets.  As the current bull market has now entered its 10th year, our recent experience tells us that it must be living on borrowed time and we should take action to avoid a severe bear market.


Looking back further into history, the calendar year of 1990 is often seen as the division between the 1982-1990 and 1991-1999 bull markets.  However, the S&P 500 in calendar 1990 had a total return loss of only 3.1%.  Black Monday occurred in October 1987 when stocks went down by nearly a third but quickly rallied back causing calendar year 1987 to finish positive 5.3% in total return.  Even with the mild loss in 1990 and Black Monday, we can consider the 1982 to 1999 period as one bull market with 17 years duration.  The point being that there is nothing in market history that informs us that a bull market cycle has to be a set duration or that the ensuing bear market has to be a certain severity.  


Despite what some may claim in the financial media or in advertising, no one can predict how long stock markets will remain high.  By the time this article has been distributed to you, we may have already entered a bear market.  Or we may be back to making new all-time highs. We have no control over stock market performance.


I believe asking “When should I get out?” is the wrong question.


Here’s why: Investors who attempt to time the market run the risk of missing periods of exceptional returns, leading to significant adverse effects on the value of their portfolios.

As we look back at the 20-year period ending 2017, investors who stayed in US large cap stocks for all 5,217 trading days between the beginning of 1998 and the end of 2017, achieved a compound annual return of 7.2%. However, they would have received only 3.5% if they missed the 10 best days of stock returns over that 20-year period.  Missing the 30 best days would have produced an annual LOSS of 0.9%.1 


For an investor whose financial plan assumed achieving substantial growth over that 20-year period, receiving only 3.5% due to being out of the market for the 10 best days instead of 7.2% could be truly debilitating to their plan and their lifestyle.  For a portfolio of $1,000,000, growth of 3.5% would mean the portfolio would grow to about $2 Million after 20 years while 7.2% growth would mean achieving more than $4 Million.2  This is a massive difference!


The appeal of market timing is obvious: improving portfolio returns by managing to avoid periods of poor performance. Type A personalities may be even more susceptible to the temptation…  Let’s imagine for a moment that you were somehow able to find out when the market was at its peak and could get out the day before the market dropped. That sounds great, but there is still another important question: How would you know when to get back in?  You have to be right twice!  If your intention is to grow funds ahead of inflation and you do not need the funds in the short run, you would need to guess correctly a second time to get back into the stock market.  Timing the market, twice, consistently is extremely difficult and this may be one explanation for why active manager track records are generally weak compared to their benchmarks.  And unsuccessful market timing — the more likely result — can lead to compromising your most important life goals.


Looking back at nearly 50 years of stock market performance, there were many up and down markets, but their length and magnitude appear to be random. We do not know if the current bull market will last another decade or just another month. But whenever downturns have occurred, these bear markets have lasted on average less than two years since 1970.3


So instead of worrying and wondering how long the current stock market performance will last, focus instead on maintaining a long-term outlook for your investment strategies, tune out media noise, and work with an advisor to develop a plan that is aligned with your life goals.


I welcome your suggestions, comments and questions.

  • 1) Source: “The Cost of Market Timing,” Morningstar 2018 Fundamentals for Investors
  • 2) These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return.
  • 3) Source: MorningstarDirect 2017

Investing involves risks including the potential loss of principal. No strategy can assure success or protects against loss. Past performance is no guarantee of future results.  Investors cannot invest directly into an index.  Diversification and asset allocation do not guarantee a profit nor protect against loss in a declining market.  They are methods used to help manage risk.