September 2018 Monthly Insight: Discipline in the Face of a Record Bull Market

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Sep 6, 2018


“This is the single greatest challenge long-term investors face: finding new reasons not to sell.”

Michael Batnick, Director of Research, Ritholtz Wealth Management

On August 22, 2018, the U.S. Stock market celebrated a bull run of 3,453-days.  This is the longest bull market ever.  That’s right.  After nearly 9½ years, the markets are still going strong. They have risen from 677 points during the deep, dark days of the great recession to 2,861.82 on Wednesday, August 22, to become the longest bull market in history.  Yet, before the end of August, the S&P 500 would set four more record highs.  It closed out the month at 2,901.52, just -0.43% below its new record.  Over the entire bull market run that started on March 9, 2009, the S&P 500 has gained approximately 330%, not counting dividends.

The most important thing to remember is this: if you had the discipline to stay fully invested since 2009, and even continually added to your investment portfolio through a company qualified retirement plan or outside savings, then you have reaped the benefits of one of the greatest bull market runs of all time.  Notably, however, as long and as great as this recent bull market has been, it is only the third best performing of all bull markets.  The 1990’s bull market (from 1992 – 2000) was up an amazing 400%.

The fact that we even recognize this bull market as the longest ever is just a technicality.  A bull market is defined by many as a steadily rising market that hasn’t experienced a drop of 20% or more from its record high. Interestingly, between March 9, 2009 through August 31, 2018, this bull market has had 206 new all-time highs. In 2017 we had 62 new highs—an average of one every four trading days.  However, from May 2011 through October 2011, the stock market lost 19.92%. That is only 0.08% from reaching a bear market and ending the run at just over 2½ years.  Do you even remember that time frame of the market?  Do you recall what the television financial personalities were saying when we were so close to a full bear market?  Well, we don’t remember either.

The stock market started off 2018 with a new all-time high of 2,872.87 on January 26.  Then, over the next 9 trading days, the market “corrected” by dropping 10.2%.  What were you thinking then?  It’s our hope you saw this drop as just the market being the market and did nothing. Perhaps you even saw this as a good time to commit to buying more shares at a 10% discount.

Markets remain volatile, as they have always been.  Yet over the long-term, markets are up an average of every 3 out of every 4 years. Since 1980, there have been 29 positive return years out of 38 years (76%); since 1950, there have been 50 positive return years out of 68 years (74%).  With the markets’ propensity to generally rise and certainly rise over the long term, it makes one wonder why a 10% drop in prices is a “correction.”  A correction from what?  Who knows? We see periodic drops in the market as an opportunity—not a correction from something wrong.

We certainly are not saying that we won’t have a drop in overall prices of 10%, 20%, or even more. In all likelihood, we will, in fact, experience such drops.  We just don’t know when that will happen, how far it will drop, or how long it will last. No one knows the answer to any of those questions.

So, given that no one knows when the market will drop or how far prices will fall, what should investors do? In our opinion, the strategy is simple, yet it’s not easy.  You should invest in an appropriately diversified portfolio that supports your long-term financial goals and objectives.  But, the most important determinant to your long-term investing success is your mindset and investor behavior.  Panicking out of the market at the bottom of a market cycle turns a paper loss into a permanent loss.  Trying to time the market is ineffective and fruitless.

To succeed at market timing, you must be capable of making perfect decisions.  You must decide on the perfect time to exit the market, and then perfectly time your reentry into the market. Yet the body of evidence shows this isn’t possible.

As Michael Batnick said, “…sitting through these dips, shallow as they might be, is never easy. This is the single greatest challenge long-term investors face: finding new reasons not to sell, even when the dips turn into corrections and the corrections turn into bear markets.  It isn’t simply doing nothing, it’s constantly making the decision to stick with the plan you put in place at higher prices.”

We hope you’ve found this review to be educational and helpful.  If you have any questions or concerns about your financial plan, goals, and objectives or your portfolio allocation to support those goals and objectives, let’s talk.  That’s what we’re here for.

As always, we are honored and humbled you have given us the opportunity to serve as your financial advisor.