Can Any Monkey Make Money in an Uptrending Stock Market?

Looking back in history at a chart of the stock markets, in hindsight, it seems so simple to make money in the markets. Buy some index funds, periodically add to them, and "voila", your money grows over time. Buy Amazon shares at $4.00 and sell them several years later at $1,000. Easy peasy, right?

You probably didn’t notice, but Monday, September 11 marked a milestone: the S&P 500 index's bull (up-trending) market became the second-longest and the second-best performing in the modern economic era. Stock prices are up 270% from their low point after the Great Recession in March 2009—up 340% if you include dividends. That beats the 267% gain that investors experienced from June 1949 to August 1956. (The raging bull that lasted from October 1990 to March 2000 is still the winning-est ever, and may never be topped.) Any diversification, trimming of positions or risk management over this period of time cost you profits and reduced your returns. Nonetheless, it's what any prudent investor should do.

With the benefit of hindsight, it’s easy to think that the long eight-year ride was easy money; you just put your chips on the table when the market hit bottom and let them ride the long bull all the way to where we are today. We tend to forget that staying invested is actually pretty difficult, due to all the white noise that tries to distract us from sound investing principles, not to mention some gut wrenching declines that test our meddle.

Consider, for example, that initial decision to invest in stocks that March in 2009. We had just experienced the worst bear market since the Great Depression (S&P 500 index down 57.7% from the peak in October 2007), and were being told many plausible reasons why prices could go lower still. After all, corporate earnings were dropping from already-negative territory. Was that the time to buy, or should you respond by waiting out the next couple of years until a clear upward pattern emerged?

The following year, investors were spooked by the so-called “Flash Crash,” which represented the worst single-day decline for the S&P 500 since April 2009. Then came 2011, two to three years into the bull, when the S&P 500 declined almost 20% from its peak in May through a low in October. Remember the double-dip recession we were in for? The pundits and touts proclaimed that another recession was looming on the horizon, which would take stocks down still further. Surely THAT was a good time to take your winnings and retreat to the sidelines.

By the time 2012 rolled around, there was a new reason to take your chips off the table: the markets were hitting all-time highs. Of course, historically, all-time highs are not indicative of anything other than a market that has been going up. If you decided to take your gains and get out of the market when the S&P 500 hit its first all-time high in 2012, you would have missed an additional 98% gain.

The headline distraction in 2013 was rising interest rates, which were said to be the “death knell” of the bull market. Low rates [it was declared] were the “reason” for the incredible run-up from 2009-2012, so surely higher rates would have the opposite effect. (The “experts” were wrong. The S&P 500 would advance 32% in 2013, its best year since 1997.)

In 2014, the U.S. dollar index experienced a strong advance, as markets began to expect the U.S. Fed to end its quantitative easing (bond buying) program. A falling dollar and easy Fed money were said to be responsible for the “aging” bull market, so this surely meant that it was time to head for the exits. Instead, the index ended 2014 with a 13.7% gain.

The following year, a sharp decline in crude oil prices was said to be evidence of a weakening global economy. The first Fed rate hike (in December 2015) since 2006 led many institutional investors to sell their stocks in the worst sell-off to start a year in market history. The 52-week lows in January and February were said to be extremely bearish; the market, we were told, was going much lower. Instead, the S&P 500 ended 2016 up 12% after being roughly "flat" for 2015.

Today, you’ll hear that the bull market is “running out of steam,” and is “long in the tooth.” New record highs mean that there is nowhere to go but down. In other words, you are, at this moment, subject to the same noise—in the form of extreme forecasts, groundless predictions, prophesies and extrapolation from yesterday’s headlines—that has bombarded us throughout the second-longest market upturn in history.

This is not to say that those dire predictions won’t someday come true; there is definitely a bear market in our future, and several more after that. But investors who tune out the noise generally fare much better, and capture more of the returns that the market gives us, than the hyperactive traders who jump out of stocks every time there’s a scary headline. This is also not to say that prudent risk management should not be part of your investing plan (trimming shares, re-balancing, hedging). As I like to say, making money in up-trending markets is not terribly hard if you don't get scared out; keeping your profits (risk management) before a big decline is much harder.

As we look back fondly at the yellow line in the middle of the graph below, let’s recognize that holding tight through big market advances and allowing your investments to compound, is never easy. But it can be extremely profitable in the long run.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://pensionpartners.com/myths-markets-and-easy-money/

http://www.businessinsider.com/stocks-bull-market-is-2nd-best-since-wwii-2017-9

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post