Enough ink has been spilled on preparing for a crash now.
Last month I myself wrote to you “This too shall pass” because this excessive retail participation in the stock markets got me all scared.
2001 and 2008 are still fresh in many people’s minds. The last 20 years saw big corrections and prolonged recovery periods. However, that doesn’t mean the next 20 years will too.
We forget post-WWII between 1942 – 1965 US saw a really long bull cycle. Returns were an average of 15%+ year on year over 24 years. Again from 1980 to 1999 until the dot-com crash, the US markets went up on average 17.7% every year. This was way above average for 20 long years creating the baby boomer generation who became millionaire retirees in the 2000s.
While losing money in a stock market crash is painful, what is probably just as painful is to watch the markets go up and up while you stay out waiting for the elusive correction or crash.
It’s hard to make sense of the idea that this bull market could still have a number of years to run. I am not saying it is going to happen, just that it could.
And if it does, this could be our baby boomer moment. Investors over the next 20 years in India equities could retire multi crorepatis. So it makes sense to prepare for a ‘long bull market’.
How can you prepare for a long bull market?
Prepare to stay invested for a long time
If you wish to earn high returns in the market you can’t get scared of equities when setbacks occur.
Have enough emergency funds, have enough insurance, avoid anything that can surprise and destroy wealth.
Create an asset allocation that you can hold during bull and bear phases and rebalance religiously.
Beware of FOMO
One of the most difficult things to do in a bull market is seeing others take irrational risks and make more money than you. It’s difficult to stay satisfied when you see out of the world returns elsewhere.
The best way to avoid FOMO (Fear of Missing Out) is by creating filters to define what you will and will not invest in. If you have a specific set of strategies, asset classes and securities you are comfortable with it is much easier to say no to everything else, regardless of how much money others are making.
If you don’t understand it, don’t invest in it is a pretty good rule of thumb.
Avoid unnecessary mistakes
Anything that sounds too good to be true probably is untrue. FOMO and greed are a deadly combination and opens you up to all sorts of scamsters and fraudsters looking to take advantage of your fickle risk management. Be aware, be alert.
Expect Pullbacks along the way
Returns in the previous long bull markets were extraordinary but they didn’t come without setbacks.
In the 41 years of Sensex, almost every year markets have fallen 10% – 20%. In 32 out of 41 years Sensex has delivered positive returns despite a temporary decline in the market.
This pullback or the temporary ‘risks’ is not a punishment. It is just the price you pay for the 2-3 times more returns you would get over other stable investments.
(This article is inspired from thoughts shared by Ben Carlson on his blog site awealthofcommonsense.com)