On this week’s episode of Tape Talk we discuss some of the big mistakes investors can make in a bull market. After all, it’s not just bear markets that cause people to lose money.
In the news this week is the Federal Reserve who raised rates once again, to a range of 1.75-2.00%. The news release included a forecast for the Fed’s consensus of two more rate hikes this year. However, the market doesn’t believe the Fed here and sees only one rate hike left on the table before year’s end. Why the disconnect?
Misstep 1 – Equating a Bull Market with Intelligence
One of the biggest misstep investors make during the run-up of a bull market is thinking that the changing value in their investments is directly related to their intelligence and market savvy. This is a dangerous position to take! One of the powerful elements of a market that trends higher is that many of the underlying companies go along for the ride. Therefore, if you’re making money in a bull market, it might just be more the market’s fault than yours.
Misstep 2 – Underestimating Momentum
The saying among traders goes, “the trend is your friend.” Still many an investor has sold their investment for modest gains only to see it tick higher for weeks, months, and years to come. Others investors have taken a contrarian view of the market and waited in cash because it’s simply “too high.” The fact is the trend is the trend until it ends. Understanding that momentum is a powerful force that will often keep things moving in a general direction is an important part of capitalizing on bull market trends.
Misstep 3 – Not Knowing When It’s Changed
No trend has yet to go on forever without some significant pullback. Therefore, regardless of the time frame you’re utilizing for your investments it is important to identify and understand what signals a change of character for the trend you’re in. We typically utilize a group of both technical and fundamental indicators to review the market’s trend as a whole. However, regardless of what you use, it’s important to identify what the current trend is and when you think it might be coming to an end.
Misstep 4 – Not Rebalancing
The market moves in cycles and assets classes, sectors, and different individual companies can often provide levels of diversification and risk mitigation. However, getting the full benefit of this diversification means taking funds from your outperforming assets and adding them to some currently underperforming assets. It can be difficult! But, when the trend changes and rotation takes place, a proper rebalance may just help you capitalize on new trends and opportunities.