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Wednesday, 22 August 2018

The American Bull Run


Today marks the longest bull run in US history.  Since March 2009 the S&P 500 has gone 3,453 days without a 20% correction. Happy days for investors.

The index has risen by 325% during this period with tech companies such as Apple, Google, Amazon and Microsoft doing much of the heavy lifting. Factor in dividends and the figure is above 400%.

So far this year the US market is up by just over 8% boosted by Trump's decision to slash corporate tax rates from 35% to 21% last year.



Here in the UK markets have gained a modest 190% total return since the crash of 2008/09 however the FTSE has been fairly flat year to date.


How to Proceed from Here

How much longer can the markets continue to rise? I do not know is the honest answer. There will be no bell rung to indicate the top so what are the options?

1. Do nothing...9 times out of 10 this is the best solution. Ignore the media stories and focus on the long-term investing strategy.

2. Lock in some gains and move to cash. I did this with some of my investments in 2016 and came unstuck as the markets continued to make gains over the next two years whilst my cash actually lost value due to low interest rates/inflation.

This timing of the markets can therefore be risky. Also you have to make two good calls...first to cash in at the top and secondly, the decision on when to re-enter the market. After the markets have retreated 10%, will there be further falls to follow. Just as we cannot know the top, so we equally cannot know when the bottom of the market decline is reached.

3. Adjust asset allocation to reduce equities and increase bonds but again you may have some similar problems to cash in relation to timing. Also in some market conditions, bonds can be volatile and provide negative returns.

Conclusion

There is no getting away from the good returns offered by the markets in recent years. I have maintained my 60/40 portfolio during most of the past decade and returns have averaged around 9% p.a. after all platform and trading costs. This compares well with my cash savings which have delivered less than 2%.

After such a good run, but not knowing when the downturn will arrive, I think the best solution is to continue with my revised strategy and at the same time accept that portfolio returns may well be lower over the coming decade. Therefore it is more a matter of re-setting expectations and accepting a period of above-average returns will likely be followed by a period of below-average returns.

Feel free to comment below if you have a strategy for the end of the bull run.

12 comments:

  1. I'll be going for 1 as I'd be pretty hopeless at 2 and will no doubt cash out and jump back in at the wrong times! The hard bit will be to ignore all the noise.

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    1. Yes, I think if you are investing for the long haul, stick to your carefully chosen asset mix, carry on and take your market returns...whatever they are.

      (Next article 'Strategies to Avoid Media Distractions'!)

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  2. According to this article, the current bull run is nowhere near the longest..

    https://www.barrons.com/articles/no-this-is-not-the-longest-bull-market-ever-1534932001

    That doesn't necessarily help with your questions about future returns or timing though.


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    1. Thanks for the link...seems like semantics but still a long period without a serious pull-back and as you say, the questions remain the same...do you carry on regardless or make some adjustments. What if you have had a really good run and are coming up to retirement?

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  3. I only got any bonds at all last year (at around 10% of portfolio) so I will probably get a few more each year as retirement comes in sight. My stage of life is a bigger influence than the headlines.

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    1. Sounds like you have a good plan. How long to retirement and what is your intended asset mix at that point in time?

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  4. Hopefully 1 but you never know!! The last time there was a slight correction in January I had the other half saying "you've lost all our money - I want you to sell them all." That was for a 10% drop!! Who knows what she would be saying if there is an 80% drop!

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    1. Yes, so far this year the FTSE was down 900 points (11.5%) over the two months Jan to Mar then gained 1,000 pts (14.5%) Mar to May and has since drifted back 300 points so a mini rollercoaster.

      As for an 80% drop...that would make an interesting post!!

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    2. I bought your DIY Pensions book and it led me to this blog. I have been using a SIPP with Hargreaves Lansdown for about 8 years to consolidate some old personal pensions in addition to some company pension schemes I hold and had formed a similar strategy around the ongoing 60:40 equities: gilts/bonds holding, currently in tracker funds as I was influenced by the Smarter Investing book by Tim Hale which makes a lot of sense. Looks like you follow a similar philosophy regarding the odds of out performing the index What interested me most in your book was the part about investment trusts as part of an income strategy which I knew little about. Anyway as you say we are all riding the market and have to hope that the current political turbulence is not too disruptive. Thanks again for the advice!

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    3. Sounds like you have found a good strategy for your investments leading up to retirement AR. I like the Tim Hale book and find it very persuasive in regard to index approach. I reviewed the book for my blog a couple of years back (books tab).

      I have used ITs for income for many years so they are certainly worth exploring as an option for income in retirement. You may also want to check out some of the articles by 'Greybeard' last year on Monevator in relation to ITs and income.

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  5. I agree - we all know the bull has to end, but we can never call when.

    Personally I hope it comes soon, as I plan to quit in a few years a sequence of returns risk is the biggest risk to my plans.

    Either way I'm determined to stick to the plan and keep throwing money into the markets. And build up my resilience for when the numbers drop.

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    1. Yes, at some point there will be a pull-back, but we do not know when or how severe. I was more than a little disturbed back in 2008/08 at the scale of the falls so hopefully the next one will not be so dramatic. Of course, the crashes provide opportunities for picking up bargains at rock-bottom prices.

      Good luck with the run in towards FI.

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