When one sector of the market has a consistent run of strong returns, wouldn’t your instinct be to jump on the train? It is human nature to see the returns others are enjoying and to want the same for your portfolio. During a bull market some investors look for the hottest market trend as a way to increase their returns. All too often, though, they hurt themselves over the longer term by chasing those higher returns. You may be better off looking at the overall market and creating a diversified portfolio tailored to you.
In this article we discuss the longer-term performance of stocks and how they compare to other asset classes.
Markets are cyclical. Regardless of the strength or duration of a bear market, it will always be followed by a bull market and vice versa. History shows that bull markets are usually stronger and last longer than bear markets. On average, bull markets last nearly five years and return 149% over that time period. Bear markets only last an average of 11 months and decline 34% over that time.[i]
Every market cycle can be different with some bull and bear markets being smaller or larger than the average. But if you consider market history, you may find that a bull market is generally longer and stronger than the bear market directly preceding it.
Investors commonly start feeling euphoric the bull reaches the later stages. After seeing stock prices rise for an extended period, you may begin to see what you think are sure bets everywhere. For example, we saw this situation in foreign stocks in the 1980s and dot-com Tech stocks in the late 1990s. Some people believe investing in the leading category is a no-brainer. Driven by the fear of missing out on the strong returns, they may shift their assets heavily into that leading category.
We refer to this behavior as heat chasing. Investors start to disregard their longer-term strategy in an attempt to chase the higher returns elsewhere. They switch strategies or start investing based on short-term emotions and greed. But it can negatively impact their longer-term investment performance. It can cause them to go in and out of the market and individual categories at the wrong times. They don’t realize the major market categories change leadership irregularly. By the time they invest in the leading sector, it may be just in time for that recently hot sector to cool down and another category to take the lead.
But that knowledge may not stop them. Investors often forget what happened the last time a similar situation happened and they followed the hot investment. When the pattern appears again, they may repeat the same behavior by investing in whatever category is attracting attention in the stock market.
Heat chasing isn’t limited to stocks. Investors may search for gains in various asset classes to gain as much profit as they can. When an asset class is going through a bull run, you may hear folks on TV or online telling warning that you’re missing out on superior returns, but following those trends may be risky. Here are just a couple less-traditional asset classes that have attracted investors in the past.
Exhibit 1: Asset Classes over Time
Source: Global Financial Data, Inc. as of 04/05/2018. US 10-Year Government Bond Index, S&P 500 total Return Index and Gold Bullion Price from 11/30/1973 to 03/31/2018.
Gold is sometimes considered a safe haven, especially by those who anticipate a global financial collapse. But how safe is gold as an investment, really? The world will always face problems. But if you analyze the history of the economy, you will find the stock market has withstood many problems and continued to rise over the long term. If you require long-term investment growth, you may be better off sticking with a diversified stock portfolio.
Whether it is gold, cryptocurrency, real estate or an equity category like energy, technology or consumer discretionary, don’t be fooled into thinking short-term outperformance is necessarily safe or sure to continue. Fear of missing out on higher returns can be difficult to overcome. Often, the best thing you can do is maintain a long-term strategy fit to help you achieve your long-term investing goals, which is why it can help to seek the help of a financial professional.
As you approach retirement, it is even more important to have a personalized long-term plan and avoid making short-sighted reactions to the current market environment. To learn more about how we can help you towards your goals, speak with one of our qualified professionals today.
[i] Source: Global Financial Data, Inc. as of 3/13/2019; S&P 500 Index Price Level from 5/29/1946 – 12/30/2013. FactSet, as of 1/14/2019; S&P 500 Index Price Level from 1/1/2014 – 3/12/2019.
[ii] Source: Global Financial Data, Inc. as of 04/05/2018. US 10-Year Government Bond Index, S&P500 total Return Index and Gold Bullion Price from 11/30/1973 to 03/31/2018.