https://www./2019/09/25/how-to-safely-navigate-a-latestage-bull-market/ How To Safely Navigate A Late-Stage Bull MarketCourtesy of ZeroHedge View original post here. Authored by Lance Roberts via RealInvestmentAdvice.com, In this past weekends newsletter, I discussed the issues surrounding “dollar cost averaging” and “buy and hold” investing. That discussion always raises some debate because there is so much pablum printed in the mainstream media about it. As we discussed:
Does this mean you should NEVER engage in “buy and hold” or “dollar-cost averaging” with your portfolio? No. It doesn’t. However, as with all things in life, there is a time and place for application. As shown above, when markets are rising, holding investments and adding to them is both appropriate and beneficial as the general trend of prices is rising. There is a reason why not a single great trader in history has “buy and hold” as an investment rule. Also, when it comes to DCA, the rule is to never add to losers…ever.
That reason is the permanent impairment of investment capital. By investing fresh capital, or holding current capital in risk assets, during a market decline, the ability of the capital to create future returns is destroyed.
Investing is about growing capital over time, not chasing markets. This is also why all great traders in history follow the most simplistic of investing philosophies:
It’s Getting Very LateWhen trying to navigate markets, and manage your portfolio, you have to have a reasonable assumption of where you within the investment cycle. In other words, as Jim Rogers once quipped:
This is the problem that most individuals face during late-stage bull market advances. Following a “bear market,” most individuals have been flushed out of the markets, and conversations of “armchair investing methods” vanish from the financial media. However, once the “bull market” has lasted long enough, it becomes believed that “this time is different.” It is then you see the return of concepts which are based on the assumption:
That is where we are today and we have created a whole bunch of sayings to support the idea of why markets can’t fall:
You get the idea. However, there is little argument that valuations are expensive on a variety of measures, as noted by Jill Mislinksi just recently. Importantly, markets are also grossly extended on a technical basis as well. The chart below shows the S&P 500 on a quarterly basis. Note that the index is pushing rather extreme levels of extension above its very long-term moving average, and is more overbought currently than ever before in history. Note that a reversion to its long-term upward trend line would take the market back to 1500 which would wipe out all the gains from the 2007 peak. Such a correction would also set back portfolio returns to about 2% annualized (on a total return basis) from the turn of the century. As a portfolio manager, however, I can’t sit in cash waiting for a “mean-reverting” event to occur. While we know with absolute certainty that such an event will occur, we don’t know the “when.” Our clients have a need to grow assets for retirement, therefore we must navigate markets for what “is” currently, as well as what “will be” in the future. The question then becomes how to add equity exposure to portfolios particularly if one is in a large cash position currently. How To Add Exposure In A Late Stage Bull MarketThe answer is more in line with the age-old question:
Here are some guidelines to follow:
The current rally is built on a substantially weaker fundamental and economic backdrop. Therefore, it is extremely important to remember that whatever increase in equity risk you take, could very well be reversed in short order due to the following reasons:
It is worth remembering that markets have a very nasty habit of sucking individuals into them when prices become detached from fundamentals. Such is the case currently and has generally not had a positive outcome. What you decide to do with this information is entirely up to you. As I stated, I do think there is enough of a bullish case being built to warrant taking some equity risk on a very short-term basis. We will see what happens over the next couple of weeks. However, the longer-term dynamics are turning more bearish. When those negative price dynamics are combined with the fundamental and economic backdrop, the “risk” of having excessive exposure to the markets greatly outweighs the potential “reward. “ While it is certainly advisable to be more “bullish” currently, like picking up a “porcupine,” do so carefully.
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