2024 was about as good a year as it gets for investors. The S&P 500, an index comprised of approximately the largest 500 US companies ended 2024 at 5,881.24, just a couple of percentage points below its all time high. This was a 25.02% total return for the year, which followed a 26.29% total return in 2023. This return came with very little volatility. 2024 didn’t see a correction (defined as a pear to trough draw down of 10%) and the worst draw down of the year was 8%. Most days were just a slow grind higher.
The largest most successful companies of the past several years did even better. The so called Magnificent Seven (Apple, Nvidia, Microsoft, Amazon, Google, Meta, and Tesla) were up an average of 63%. Nvidia alone was up 171%. Bitcoin was up 121%. This is what a raging bull market looks like.
Bonds didn’t fare as well due to rising interest rates, but inflation is down, and fixed-income is paying a decent rate of interest to investors after a couple of years of these rising rates.
I offer a few suggestions for how to think about investing during this bull market. This is not a post that will predict whether the good times will keep rolling or not. These are things that I will be doing (and not doing) this year as I enjoy the returns and prepare for the inevitable bear market that will appear at a future inopportune time. Some of these activities are good to do every year while others are suited to a bull market.
Here are some things to consider when preparing for the next bear market during a bull run:
1. Look at your needs for the year
Do you have a large, planned purchase? Will you need liquidity? Is your cash reserve sufficient? The current bull run could be a good time to fund those buckets.
2. Have realistic expectations
While it is good to take some time to enjoy your gains (this was a really good year for investors after all!) a 25% return for the S&P is significantly above the long term average return of around 10% annually. It is possible that future returns could be lower than average. Either way, focusing on things you can control such as saving more, growing your business or career, and keeping your allocation balanced are the way to go.
3. Don’t give in to FOMO
Someone you know probably has most of their money concentrated in a company like Nvidia and you may be tempted to concentrate your investments as well. This is likely not worth it as it is very difficult if not impossible to accurately predict which single company will outperform in the future. The downside could be severe under-performance which could put your retirement and other future goals at risk.
I’ve missed most of the high flyers over the years due to my diversified investment strategy and it has worked out just fine. In hindsight I could have done much better but in reality I likely would have done worse due to hindsight bias.
4. Prepare for a downturn (mentally)
We have been in a bull market for many years and it is easy to get complacent after a 25% up year. Eventually markets will turn. We cannot predict exactly when or how this will occur but there will be a bear market in our future.
I can tell you from experience with hundreds of clients (and my own feelings!) that the transition into a downturn after a bull market can be emotionally jarring. Take some time while the market his high to consider how you will feel, and what actions you might take (or not take, which is usually the best answer for someone with a properly diversified portfolio) when the down-turn comes.
One mental trick for coping with a downturn I’ve been using for years after hearing about it from Josh Brown at Ritholtz Wealth Management is to have a list of companies and assets you feel you have “missed” on the way up that you will buy if their prices drop significantly. This could be anything such as Nvidia, Palantir, or Bitcoin that you wish you had bought prior to the run up. Have some cash or fixed-income set aside and enter extremely low Good Til Canceled (GTC) limit buy orders for your favorite companies. Having a chance to purchase even a small amount of your favorite company at a low price could help offset the feelings of loss while the majority of your portfolio is falling. You might even find yourself rooting for a bear market!
5. Look at your concentrated positions
Due to the massive out-performance in some areas you may be finding yourself with a concentrated position or two. Now is a good time to evaluate these positions and decide if you should continue to hold them, take some profits, or even add to them. It is important to consider the downside of a concentrated position. If the position dropped in half what would your net worth look like and how would this impact your future needs and goals? What if the position was worthless?
Extra care should be taken for concentrated positions in the company that you work for given that your income and career prospects are also tied up with this company.
6. Re-confirm your risk tolerance and target allocation
Due to the strong gains in equities and poor year for bonds your portfolio is likely to have more risk assets than it did at the start of the year. While the market is high is a good time to re-evaluate your risk tolerance and consider the ideal mix of stocks, bonds, cash, and alternatives in your portfolio. Having the appropriate allocation that you will stick with is essential to navigating the inevitable bear market that will eventually follow this bull run.
7. Rebalance to the target allocation
If your portfolio is out of balance this could be a good time to trim your equities a bit (selling some high) and reinvest the proceeds in fixed income (buying some low).
You don’t need fancy software to re-balance your portfolio. A calculator will do. I use this simple excel sheet:
I hope this helps you prepare for the next bear market during this bull run. If you have any questions, comments, or thoughts on this topic please contact me. I try to reply to as many emails as possible.
