Stock markets are a lot more fun than bear markets, but they can also warp the brain.
Here are 9 questions I’m thinking about right now in one of the big ball markets of my life:
1. What if I’m not as smart as I think I am? During a bullish market you start to feel that everything you touch turns to gold. Stock markets can make you feel like a genius (just like bear markets make you feel like an idiot).
It is important to stay humble the more the markets go.
2. What do I do wrong when I think I currently believe for sure? I’m not 100% sure of too many things when it comes to markets and investment.
But there are certain things I have a lot of confidence in right now that will probably be wrong in the future. This is how things work in the markets.
Some people think that cryptography will change the world forever. Others assume it is a joke destined to fail.
Some people think that interest rates will end up calling more from here. Others assume low rates are here to stay.
Some people are sure we are in one of the big bubbles in history. Others assume that this time is really different in many ways.
Something you feel firm about right now will seem silly in the future.
It is important to have an open mind about what could happen in the markets.
3. What will seem obvious with the benefit of retrospective? It now seems obvious that the actions should have rallied furiously after the fall of the pandemic.
The Fed threw the kitchen sink into credit markets, people received government checks, unemployment benefits made up for lost wages, and degenerate players had nothing better to do with their time than invest.
Of course, the bag is higher!
But the doubling of the stock market in 15 months did not appear on anyone’s radar in March or April 2020. Most people thought it was only a matter of time before new lows were set.
If the stock market continues to charge higher, it will seem obvious a posteriori
If the stock market falls out of bed, it will seem obvious a posteriori.
If inflation is transient or stays high or falls somewhere in between, it will seem obvious a posteriori.
It is important to remember that the past is clean while the future is a mess.
4. Do I have a plan or a portfolio? There is a big difference between keeping a handful of investments and a real investment plan.
A portfolio consists of buying stocks, funds and other types of investments. A plan involves creating a decision-making framework to guide your actions.
You can do well with an investment portfolio when things are going well.
It’s important to remember that a portfolio doesn’t help as much if you don’t have a plan when things get complicated in the markets.
5. Am I making good decisions or am I just lucky? There is nothing wrong with being lucky in the markets. Companies continue to accept the money earned by luck.
But luck is not a repeatable process.
It’s important to be honest with yourself about where your performance comes from during a bullish market.
6. How did I react during past recessions? Past performance is not indicative of future results, but past behavior is a good barometer of future behavior.
Did you rescue in March 2020? Did you want to rescue? Did you buy? Did you stop? Have you rebalanced?
It’s important to take stock of your past behavior during turbulent markets, as it’s a decent approximation of how you’ll react next time.
7. What discipline does my investment approach have? During the bull markets it feels silly to sell anything. During bearish markets, it is foolish to buy anything.
Discipline and risk management feel useless when stocks seemingly do nothing but rise.
It’s important to remember that you can’t just be disciplined when you feel like it.
8. Is my portfolio strong enough to handle various market environments? A portfolio that is positioned exclusively for the stock markets will probably be fine most of the time.
But you still have to prepare for the eventual correction or the bear market.
It’s important to remember that markets don’t always go up.
9. What is my plan for the next recession? The fall of Corona ended so quickly, most investors who were not prepared for it were offered a mulligan.
It wasn’t a drag market dragged down like the 2008 crash that took years to recover. Investors rushed in. Rapid gains can overcome lack of investment planning.
Expanded bear markets may be a thing of the past, but market recessions need to be taken into account no matter how long they last.
I spoke to several investors who had no idea what to do during the accident because they had no plan before. Even a lower plan is better than no plan.
It is important to prepare for a wide range of market outcomes, both good and bad.
To read more:
10 Truths of the Bear Market
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