Things to Keep in Mind When Stock Markets Keep Going Up

by David@MoneyNing.com · 8 comments

Wow! Volatility is back in a big way almost as soon as I wrote this piece. I try to write a little ahead, and I thought about not publishing this because markets are no longer going straight up. But then again, what better way to drive home the point of how stocks don’t always go up than when stocks are actually down a little?

What do you think? Did you feel any different a couple of weeks ago when stock values made you feel wealthier? Here’s what I thought you should’ve been thinking about a few weeks ago when stock prices seem unstoppable.

One of Warren Buffett’s most memorable quote is “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” But when the market keeps going higher, you could argue that there’s a more appropriate one for the masses.

You are never as rich as you think you are in a bull market.

The significant push higher lately has been nothing from breathtaking. April was a big month after recovering a bit from the March lows. Then you’d think the momentum would slow down in May but that came and went with another serious gain. June did slow a bit but the markets were still positive. Then it was July and we were off to the races again. And what happened in August? The S&P 500 notched its best return in August since 1986. In fact, the S&P added 35.4% since April, and that five month record was the best since 1938!

Volatility’s picked up a bit in September, but it’s almost difficult to not have made money with any stocks or stock funds you bought in the past five months.

In times like these, it’s hard not to feel like you’re rich beyond belief. But thinking you are rich now is very dangerous because stock values being high just means that future expected return is low. In simple terms, you are in effect borrowing from future returns by front loading that value upfront.

Sure, you can sell your stocks now and cash in some returns, but what if it keeps going up? You could’ve easily made the same argument two, three, even four months ago. Those who sold out then missed out big time. It’s extremely tempting to time the market, but market timing is a loser’s game. You have to remember that you need to be right on when to buy and sell, plus you have to make up the difference in higher tax costs of selling big pieces of your portfolio at a gain.

The market’s already corrected some, but what if it’s the start of a more prolonged crash? We’ve gone down this road before, haven’t we? In fact, we don’t even have to look that far back. It was only last year when the market gave you a return of 30%. You probably thought your finances were solid then, but the pandemic hit and the gains all but vanished.

The next bear market is just around the corner, or we could already be in one. We know this is true when we sit down and think about the past, but we often forget in the heat of the moment. Let this be a reminder. Here are a few things to avoid in light of this fact.

Don’t start spending more money.

Known as the wealth effect, the theory is that many people will spend more money when the value of their assets rise. I’m guilty of this. While I’m not swimming in money due to this bull market, I sure feel much more financially secure today than I did in April. I noticed that I don’t pinch my pennies as much as I had just a few short months ago. I feel less stressed out when say, my kids leave the light on. I’m also more relaxed when my family suggests we order takeout at a slightly pricier place for example.

What about you? Perhaps what you are planning to buy was planned all along, but have you been more relaxed at the thought of buying a slightly better version of the same thing? That’s the wealth effect. It’s more subtle than, say, wanting to buy a new car or house, but you are still spending more money than you should if the feeling of financial security of this bull run is causing you to buy the latest model Dyson vacuum cleaner when you usually look for last year’s model at a discount.

Don’t start focusing your investments only on recent winners.

This one hits right at home because I have a few friends who keep reminding me how much money they’ve made buying Tesla stock. For those who don’t know, Tesla’s stock value has gone up six times since March just a week ago. While I probably would’ve been up big if I joined in on the hoopla, buying into the hype can backfire in a big way because the stock fell 20% just in the last week. It’s more common than you think too, because stocks that shoot up often come crashing down really quickly too.

If you are treating the stock market to build wealth long term, then it’s best to not treat it like a casino. You never know when a stock, or a sector, is going to start outperforming or underperforming. Everyone believes energy stocks are a no go these days, but this is after the investments have turned sour. Virtually no one thought seven years ago that the energy market was going to be a really bad investment for a long time, but here we are, with Exxon Mobil’s stock doing so badly that they are being kicked out of the Dow Jones Industrial Average. What if the winners of today go through a seven year stretch of no to negative returns? How will you react?

Don’t start taking on more risks.

The stock market won’t go down because the Fed is on our side right? It’s easy to start loading up on stocks when the market keeps going up, but we all know that eventually, the bubble would lose some of that stream. It sounds obvious when I say that the next bear market is right around the corner, and not to take big risks after a stock market run up, but some of my friends are doing cash out refinances to invest in the stock market. What can go wrong?!?

Even if you aren’t actively ratcheting up risks by buying stocks these days, don’t forget to re-balance back to your planned stock and bond mix. After a spectacular stock market run up like this, I bet your portfolio is tilted more towards stocks than what you were comfortable with when you made that investment plan in calmer times.

Bull markets are great for our portfolio, but don’t let a good thing end up costing you financially.

Here’s a parting thought.

Just as you are never as rich as you think you are in a bull market, you are never as poor as you think you are in a bear market either. Keep that in mind next time the market crashes and you are sweating bullets.

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  • Mobius says:

    Steady as a rock. Oh I’m talking about my nerves and not the stock prices! Keep buying!

  • Beau W. says:

    You nailed it David. It’s going to be up and down till the day you start collecting the dividends. Long term money will always win. That’s my way of investing.

    • David@MoneyNing.com says:

      And it’ll be up and down even after you start living off the portfolio! Volatility is a part of investing. If it was a sure thing otherwise, then the prices would be much much higher. So high in fact that it may not be worth owning any stock!

  • Be Like Mike says:

    Tesla is up 13% today. I hope you have more pain killers because I know it must hurt inside!

  • Christie says:

    Good timely post. Like you always advise us – stay the course.

    Stay the course when stocks are down, and stay the course when stocks are up. It’s worked so far, and will work in the future!

    • David@MoneyNing.com says:

      If I sold when it was down a few days ago, then I would’ve lost out on the 2% or so of the past few days. It doesn’t sound like a lot, but sometimes you only get 2% for the whole year! Stay the course indeed.

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