The current bull market in stocks (defined by prices that continue rising without interruption by a 20% or more decline) began for the S&P 500 just over eight years ago in the depths of the 2009 recession. Since that time, the benchmark index has gained 255%, with just four corrections (defined as a decline of 10% or more), the last of which occurred at the beginning of 2016, according to Standard & Poor’s. Although not the longest bull market on record, this is a remarkable run by any standard.
So how much longer does this bull market have to run? No one knows for sure. But one thing is certain: another bear market will eventually revisit us at some point in the future. What can intelligent investors do now to prepare for this day?
Cover known or predictable cash needs now: Cash needs could come in the form of needing a new car, a home, tuition, a wedding, or taxes, or many other things. Substantial expected cash needs over the coming 12-18 months that can be reasonably estimated today should be covered now. This avoids the possibility of being forced to sell stocks in the midst of a serious decline.
Ensure that your portfolio is properly balanced: Be sure that your mix of cash reserves, bonds, and stocks is properly tailored to your unique personal situation. The mix should reflect your long-term investment objectives, time horizon, risk tolerance, and overall financial circumstances. Cash reserves provide stability and liquidity for financial emergencies. Bonds offer steady (although currently modest) income and can dampen overall portfolio volatility. Stocks, at the cost of greater price volatility, have historically provided the highest long-term returns and the best opportunity for building and maintaining family wealth over the long run.
Consider that if an investor determined three years ago that a 60-65% allocation to stocks was appropriate, and the markets have now carried that exposure to 70-75% today, rebalancing is likely in order. This discipline is vital to successful investing. Also, keep in mind that while today the concern is that the level of stock exposure may have become too high, at other times, in other markets, we may well be in the reverse situation, where bonds should be pared back and capital added to stocks. This is disciplined portfolio management around a plan, not market timing.
Maintain Diversification: Reduce your exposure to industries or stock positions that have grown too large. This element of portfolio rebalancing involves maintaining equilibrium around economic sectors, industries and individual stock positions. Portfolio concentrations of any kind are a double-edged sword, and should be carefully analyzed and monitored. While they can be extremely lucrative, they can at other times be tremendously damaging or even ruinous to one’s financial health.
For example, if we were prescient enough to invest in Amazon in the first quarter of 2009 at $50 per share and at that time it represented 2.5% of a 40-stock portfolio, left unaltered it could easily represent 20% of the same portfolio today. Is 20% the ideal weighting today? Clearly, paring the position and taking some profits here is sensible, despite the exit requirement of paying some capital gains tax to Uncle Sam.
Keep portfolio quality high: Maintaining high quality portfolio positions will reduce portfolio volatility. Numerous studies show that higher quality stocks tend to exhibit less volatility and perform better during corrections and bear markets. This is precisely one reason why the stocks of high quality businesses are often more expensive from a valuation standpoint. Paying a premium to invest in higher quality businesses is worthwhile, as the quality acts as a kind of portfolio insurance against behavioral finance biases during bouts of volatility. Upgrading the quality of your portfolio before the bear comes can help one stay the course and thus achieve long-term financial goals.
Keep your emotions in check: Because no one can predict the timing of market tops or bottoms, we encourage investors to take a long-term view. This means resisting the temptation to abandon a sound, long-term investment plan, dramatically alter one’s investment mix, or make emotional investment decisions based on what’s currently happening in the news. Remember that you are investing to achieve a long-term goal, not avoid a short-term loss.
It’s natural to be nervous or alarmed when the value of one’s portfolio declines. The generous rewards of long-term investing often come with price fluctuations that can be both severe and unpredictable, giving even the most stoic of investors’ second thoughts. But this is the price of admission to the greatest show on earth. So mentally prepare yourself now to stay the course by adhering to your investment plan and refraining from making emotionally-charged decisions that are likely to be financially self-sabotaging.
Plan to continue regular investing: If you are working, plan to continue regularly investing a portion of your income. This strategy, called dollar cost averaging, enables you to work a bear market to your advantage by lowering the average price you pay for investments. Again, the point is to stick to your plan.
Set realistic expectations: Over the years, each of the three major asset classes has played an important role in portfolio construction due to their unique risk/return characteristics. Just as generals err by “fighting the last war,” it’s easy for investors to err by assuming that the best projection of future returns is a replay of the recent past. We believe that you should plan to expect less generous returns in the coming years. Setting reasonable expectations for your investment plan will also help you to keep future market corrections in perspective.
Jeff Van Fossen, CFA, is Managing Director, Chief Equity Strategist, Portfolio Manager at Ancora Advisors LLC a SEC Registered Investment Advisor.
The mention of specific securities, types of securities and/or investment strategies in this newsletter should not be considered as an offer to sell or a solicitation to purchase any specific securities or to implement an investment strategy. Please consult with an Ancora Investment Professional on how the purchase or sale of specific securities can be implemented to meet your particular investment objectives, goals, and risk tolerances. Past performance of these types of investments is not indicative of future results and does not guarantee dividends/interest will be paid or paid at the same rate in the future. The data presented has been obtained from sources that are believed to be accurate and credible. Ancora Advisors makes no guarantee to the complete accuracy of this information. The indexes discussed are market performance indices and are not available for purchase. If you were to purchase the securities that make up these indices, your returns would be lower once fees and/or commissions are deducted. Past performance of these indices is not indicative of future results of the securities contained in these indices.
Ancora Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States. A more detailed description of the company, its management, and practices are contained in its “Firm Brochure” Form ADV, Part 2a. A copy of this form may be received by contacting the company at: 6060 Parkland Blvd, Suite 200, Cleveland, Ohio 44124, Phone: 216-825-4000, or by visiting our website www.ancora.net/adv