Asset Classes in Financial Bull Markets

Key Takeaways

  • When an investment category or asset class has caught the attention of investors, it doesn’t mean it is a better investment.
  • Stick with your longer-term strategy to avoid making emotional investing mistakes.
  • Your asset class selection is a crucial factor in determining your overall success. Changing it based on the economy too often could be detrimental.

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.

Bull Markets: Stronger and Longer

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.

Don’t Get Caught Chasing the Heat

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.

A Study on Less-Traditional Asset Classes

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.

  • Cryptocurrencies: Just think back to 2017 when bitcoin and other digital currencies were all the craze. You could hardly go outside without hearing someone talking about Bitcoin and the sky-high returns investors were seeing. Before you knew it, Bitcoin’s price plummeted back to earth and investors were back to talking about stocks. Cryptocurrency isn’t alone—booms and busts in specific asset classes have happened many times throughout history. Many investors forget the past and think because it’s a different asset class that it’s different this time.
  • Gold: As with most asset classes, gold tends to go in and out of favor as a hot investment. This boom and bust cycle is typical of commodities. But timing gold booms is risky. Further, returns may not be as stellar as promised. From 1973 (when gold became freely traded) to 2018, US stocks have seen an annualized return of 10.4% compared to US bonds’ 7.5% annualized returns and gold’s just 6.0%.[ii]
  • (Exhibit 1.) Keep in mind, these numbers reflect returns in both bull and bear markets.

Exhibit 1: Asset Classes over Time

Exhibit 1: Asset Classes over Time

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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.

  • Real estate. Another example of an asset class that garners a lot of attention is real estate. Leading up to 2007-2008, home prices rose steadily during a long period of easy credit, some people considered real estate to be a safe investment that couldn’t possibly lose value. But during the last economic recession, home prices started declining. Real estate is far from riskless, and it may require a lot of maintenance and attention of you own the physical properties yourself. If you choose to invest in a real estate investment trust (REIT), which is an indirect way to invest in a pool of properties, you may face other issues like illiquidity or reinvestment risk.

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.

We Can Help You Stay Disciplined

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.

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Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.