Stocks may look a little wobbly right now, peeling back from a healthy, multi-month rally. Don't read too much into the current weakness, though. It's not necessarily the rebirth of last year's bear market. In fact, a bull market could still be in the making. This pullback could just be the first real test that ends up proving its mettle.
And there's a very specific reason you'll want to remain optimistic about that possibility. Despite not knowing exactly when and where the stock market's going to hit a major low, failing to position yourself for long-term bullishness could end up costing you a small fortune.
Be proactive ... about becoming passive
Actually, there are three mistakes it's easy for investors to make during the transition from a bear market to a bull market. Two of them are relatively minor, however, in comparison to the third and most significant one.
The first of these potential missteps is an effort to offset your bear market losses by beating the broad market's overall return during the next bull market.
That's not to say it can't be done. It's simply to point out that for most people, the risks required to do so are too great, and the effort is too time-consuming. Indeed, not even the professionals can beat the market with much consistency.
It's true. Standard & Poor's keeps regular tabs on the performance of actively-managed mutual funds available to U.S. investors. As has been the case since S&P started doing the number-crunching 20 years ago, most large-cap fund managers have been trailing the performance of the S&P 500 for the past five, 10, and 15-year time frames.
Specifically, for the past five years, more than 86% of funds have underperformed the S&P 500. That figure swells to over 91% for the past decade. For the past 20 years, more than 93% of U.S. fund managers have lagged the S&P 500.
While smaller investors have something of an advantage in that their trades don't move the market the way a big fund's can, fund managers enjoy an even bigger edge -- access to data, people, and tools helping them keep a handle on the market. The fact that most of them still can't beat the market is a testament to how tough it is for anyone to do so.
The second mistake you'll want to sidestep at any cost? Again, this one isn't fatal, but it is well worth avoiding -- navigating a new bull market without a specific goal or plan for your portfolio.
This is largely a matter of sector-based diversification, although depending on your circumstances, asset classes like stocks, bonds, commodities, and even cash should also be considered. The plan doesn't have to be a complicated one, either. It simply has to be a clear framework that prevents you from "winging it" only to end up unknowingly building an imbalanced (and therefore highly vulnerable) portfolio. Most brokerage firms provide online tools to help you keep an eye on your portfolio's diversification.
Finally, and most importantly, the biggest mistake you can make at the onset of a new bull market is not being already in the market at its inception.
It's an easy mistake to make. Anyone not in the market right now may be waiting to see for sure that a new bull market is underway before plowing back in. The problem is, by the time you know for sure, a bunch of potential gains are already in the rearview mirror.
Numbers dug up by mutual fund company Hartford Funds make the point quite clearly. For instance, the first month of the average bull market dishes out a gain of 13.6% before rallying 25.3% during its first three months. Now compare that to the average bull market's end-to-end gain of 115%. That's a lot more, but it's spaced out over the span of more than two and a half years. In this same vein, know that nearly three-fourths of the time, the first half of the bull market outperforms the second half.
Moral of the story? Waiting for rock-solid evidence of a new bull market could cost you a heck of a lot more than suffering the entirety of the average bear market loss of 35%.
It's never too late to start, or reset
Does this information embolden you or only increase your anxiety?
If it's the latter, it may be a sign that you've lost sight of the bigger picture by getting too caught up in the market's day-to-day action. More to the point, it suggests you know you're holding too many of the wrong, shaky stocks that you can't simply sell now.
If that sounds like you, it's OK. Take a breath, step back, and just remind yourself that investing is a long-term game won by people with a plan -- even just a simple one. Now, go make that long-term plan and get back (or stay) in the market, strategically shedding the holdings you don't really want for the long haul and replacing them with ones you do.
Just don't delay in that effort. Even if not right now, a bull market is coming sooner than later. You don't want to miss any of it. Instead, you want to be exposed to all of it with a diversified portfolio that you can confidently sit on for its duration.
