Monday, March 24, 2014

Nobody knows which way the bull will run next

People that know me, and regular readers of my column, are aware that I’m fond of history. I believe history can teach us a lot, and if we paid attention to it, we might all be able to avoid making unnecessary mistakes.

In the world of investing, history is an important factor, but it should be only part of the equation when setting the course and making modifications in your portfolio.

For example, you wouldn’t drive down the freeway only checking the rearview mirror. What you already passed on the roads is a factor, but it can’t define with certainty what lies on the road ahead.

Coming off a brutal winter, many auto accidents were caused by sudden, unexpected whiteout conditions where all visibility was lost. If drivers knew there was a whiteout in the road ahead, they could simply pull off the road or change course. But the fact is, you just don’t know.

The world of investing is similar to a long drive down the freeway where conditions can change without warning regardless of the weather forecast.

We recently passed the fifth anniversary of the bull market. The upward progression has not been straight. In fact, there have been several occasions over the last five years when the market stalled or turned downwards and many investors thought a market collapse was imminent.

But instead of falling, the market has been resilient and bounced back to continue its assent. Now five years old, the current bull market is only the sixth bull market to last that long since World War II.

Of the six, only three continued on past its sixth anniversary. In other words, with history as a guide, there’s a 50 percent chance the market will continue to climb. And a 50 percent chance it will head back downward.

What strikes fear into the hearts of many investors is that the three that didn’t reach a sixth anniversary ended very badly. I recall the October 1987 plunge when stocks plunged 20 percent in a day like it was yesterday.

More recently, the horrific downturn of the 2007-09 “great recession” still lingers vividly in my mind. On the other hand, the bull market in the 1990s far exceeded its fifth birthday. In fact, it fell just short of running for 10 full years.

So, just exactly what does all this history mean? In my opinion, it means we need to be mentally prepared for a downturn. But that’s not to say that we should expect a collapse.  A lot of indicators seem to suggest that there is a lot of gas left in the tank. I would not be surprised if the current rally does get to celebrate a sixth birthday.

The bottom line, of course, is that nobody can predict the future with absolute certainty. Recently, fuelled by international events, the markets fell dramatically in one day. The very next day they bounced all the way back and then some.

History does teach us that things often happen — and change — at lightning speed. As an investor, I continue to suggest that you should diversify, not put all your eggs in one basket and keep your emotions in check. History shows that investors need an iron stomach.

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