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http://www.cnbc.com/id/102651776
S&P's third-longest bull market ushers in stock volatility
As of market close on May 6, the current rally for the S&P 500 of 2,249 days is the third-longest U.S. bull market in history—surpassing a 1974–1980 run by one day. ([url=http://twitter.com/share?url=http://www.cnbc.com/id/102651776&text=As of Wednesday%E2%80%99s close this bull market became the third-longest in]Tweet this[/url])
Even more amazing is that we've gone 941 market sessions (or 1,371 days) since the S&P 500 has experienced a 10 percent correction on a closing basis.
There's really only one way to process this data. Equity exposure has made winners out of everyone since 2009, but the winners in the next stage of the bull market will be those that demonstrate the most discipline.
The advice for smart long-term investors doesn't really change: Consider valuation, rebalance when the opportunity arises (and stock gains demand it), and diversify your holdings.
But that's not enough. Frankly, you should know that already.
So here are four points related to the general rules of investing that will help you to improve your odds of long-term success as we head into what could be a more volatile market phase.
1. Pay attention to valuation—but don't expect it to predict the next market direction.
Valuation—the price you pay for earnings, assets minus liabilities, cash flow, etc.—is one of the best indicators of future returns. And current valuations suggest that stock prices are vulnerable to unexpected shocks, and long-term returns have an increased probability of trailing historical average returns.
Need an expert opinion here? On Wednesday, Federal Reserve Chair Janet Yellen said equity valuations "generally are quite high."
But remember, although valuation is useful in setting return expectations, it is a terrible market-timing tool. Market valuations tend to stay at relatively high or low levels for extended periods of time.
2. Volatility is not the enemy.
Stocks provide you with the best chance of outpacing inflation and reaching your goals. But the cost of higher expected returns is higher expected volatility.
The wonderful thing about return volatility is that it works in favor of long-term investors. High volatility in the short run provides rebalancing opportunities that allow you to buy low and sell high. Meanwhile, stock market returns over longer time horizons tend to be less volatile.
3. You should consider rebalancing, but don't ignore bonds just because rates are expected to rise.
If you haven't rebalanced in a while, then now is probably as good a time as any.
S&P's third-longest bull market ushers in stock volatility
It's now been 941 market sessions (or 1,371 days) since the S&P 500 has experienced a 10 percent correction.
As of market close on May 6, the current rally for the S&P 500 of 2,249 days is the third-longest U.S. bull market in history—surpassing a 1974–1980 run by one day. ([url=http://twitter.com/share?url=http://www.cnbc.com/id/102651776&text=As of Wednesday%E2%80%99s close this bull market became the third-longest in]Tweet this[/url])
Even more amazing is that we've gone 941 market sessions (or 1,371 days) since the S&P 500 has experienced a 10 percent correction on a closing basis.
There's really only one way to process this data. Equity exposure has made winners out of everyone since 2009, but the winners in the next stage of the bull market will be those that demonstrate the most discipline.
The longest bull markets
Period: Dec. 4, 1987, to March 24, 2000
Run in index points: 223.92 to 1,527.46
Change: 582.15 percent
Duration: 4,494 days
Period: June 13, 1949, to August 2, 1956
Run in index points: 13.55 to 49.74
Change: 267.08 percent
Duration: 2,607 days
The advice for smart long-term investors doesn't really change: Consider valuation, rebalance when the opportunity arises (and stock gains demand it), and diversify your holdings.
But that's not enough. Frankly, you should know that already.
So here are four points related to the general rules of investing that will help you to improve your odds of long-term success as we head into what could be a more volatile market phase.
1. Pay attention to valuation—but don't expect it to predict the next market direction.
Valuation—the price you pay for earnings, assets minus liabilities, cash flow, etc.—is one of the best indicators of future returns. And current valuations suggest that stock prices are vulnerable to unexpected shocks, and long-term returns have an increased probability of trailing historical average returns.
Need an expert opinion here? On Wednesday, Federal Reserve Chair Janet Yellen said equity valuations "generally are quite high."
But remember, although valuation is useful in setting return expectations, it is a terrible market-timing tool. Market valuations tend to stay at relatively high or low levels for extended periods of time.
2. Volatility is not the enemy.
Stocks provide you with the best chance of outpacing inflation and reaching your goals. But the cost of higher expected returns is higher expected volatility.
The wonderful thing about return volatility is that it works in favor of long-term investors. High volatility in the short run provides rebalancing opportunities that allow you to buy low and sell high. Meanwhile, stock market returns over longer time horizons tend to be less volatile.
3. You should consider rebalancing, but don't ignore bonds just because rates are expected to rise.
If you haven't rebalanced in a while, then now is probably as good a time as any.
