Bull Markets, What Now??

Are you an investor that is worried about the latest bull market?  Are you concerned about the valuations of equities?  There is no denying the fact equities in recent years have been advancing at an alarming pace.  But that does not mean that they will be slowing any time soon.  As any investor knows there is no way to predict the market’s next move or how far it will go either up or down.  What investors should know is that it is not wise to try to time the markets as many studies have shown.  In the last ten years if someone missed the top days the markets moved and timed those days only, their portfolios returns a fraction of the ones who stayed invested and did not try to time the markets.

As the US markets continue to set record highs there appears to be no end in sight. But again that does not mean the markets have to continue to set records nor does it mean that there will be a correction.  But it may indeed be wise to take some profits now provided there are some losses that can be taken as well to off-set the gains.  But as more and more firms report marginal earnings or IPO’s are held for companies that have little or no earnings these are areas of concern.  For older investors placing some of a portfolio in safer assets or cash may be a wise move for those who are nervous.  For younger investors the risk may not seem that serious as they in theory will have much more time to regain any losses they may experience.

In recent years investors have seen returns that are not to be considered the normal returns one can expect.  In a conservative 60% equity and 40% bond portfolio an inflation adjusted return of 3%-5% can be expected while the long term average is closer to 5.5%.  The reason for this is bond funds are producing returns that barely are keeping up with inflation while equities are giving investors double digit returns.

As I have discussed in other posts rebalancing is key to one’s long term success.  In the recent bull market anyone who has equities in their portfolio is going to be out of balance if they have not rebalanced in recent years.  There is no way a portfolio that includes a large portion of assets in bonds is still in balance in today’s markets.  Provided it is cost effective and there are no major tax implications rebalancing is simply selling assets that have appreciated and sell those that have depreciated.  If you do not want to rebalance in that manner it is possible to add new funds into the assets that depreciated until you are back at your desired asset allocation thus avoiding any taxes.

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