NEW YORK (MainStreet) — Speculation that the stock market is due for a correction has some investors concerned that the bull market might be ending soon.
While determining when the market is poised for a pullback can be a fool’s errand, investors should be prepared because “by any measure you want to look at it, we are close to the top of the market,” said Matthew Tuttle, CEO of Tuttle Tactical Management, based in Stamford, Conn.
“Investors who are prepared will be fine, but those who have come to believe ‘this time is different’ will get hurt like they always do,” he said. “This bull market will die slowly, but all bull markets eventually die.”
Avoid Making Predictions
Instead of trying to calculate when the pullback will occur, investors should either react to it when it does or start divesting their assets “once it starts to go down,” Tuttle said.
“Don't try to predict it,” he said. “The market timers’ hall of fame will always be empty. We are near the top, but the market can keep going up for awhile regardless of valuations.”
Since bull markets can not last forever, one option is to allocate your retirement funds to a tactical money manager or tactical ETF, Tuttle said. Even if you get back to even and “earn” all of your losses from a previous dip in the market, investors should not be complacent with large losses in their retirement funds.
Buy and hold aficionados will argue that the strategy works, because even though the market falls, it eventually comes back. That philosophy is a fallacy, since investors can easily lose half of their net worth, he said.
Investors who had $1 million in the Nasdaq back in 2000 when it reached a high of 5,135 lost a large chunk of savings when it crashed in October 2002 at 1,108 during the dotcom bust. While the Nasdaq has reached the 5,000 level again, this means that all the investors who left their money in the tech-driven index are back to square one and only have $1 million.
“The problem is that you should have at least $2 million today,” Tuttle said. “The longer you take this strategy out, the more you could have had compared to what you actually have.”
It is nearly impossible for a portfolio to regain its severe losses and earn more in addition to the initial investment.
“You never can catch up to what your portfolio should have been,” he said. “The answer is to take a tactical approach that can get you most or all of the gains while avoiding most, if not all of the losses.”
As the Federal Reserve prepares to raise interest rates this fall, weak employment figures, stagnant wage growth and negative geopolitical issues could be indicators the economy is bottoming out.
“If the Fed has exhausted their playbook and we are still headed towards a recession then we have a problem,” Tuttle said. “If we know the Fed has our back, but we also don't believe they have any options left, then one day we have a decline that doesn't rally back.”
The continued volatility in the stock market could be signaling an end to the bull market. Some of those warning signs include several consecutive years of strong performance, extreme levels of overvaluation and investor euphoria, said Joe Jennings, senior vice president of PNC Wealth Management in Baltimore.
The bursting of the technology stock bubble in early 2000 was a classic example of the end of a bull run. The S&P 500 was trading in excess of 30 times earnings results, he said. The overvaluation occurred despite the fact that many of the best performing technology stocks did not produce any earnings, but investors simply ignored the indications that something was amiss.
“There was a belief among most investors that the glory days of the bull market could last indefinitely,” Jennings said.
End of Market Cycles Difficult to Determine
Attempting to time the end of a bull market or other turning points which occur in market cycles is not only difficult, but it can be a mistake because “periods of over or undervaluation can persist longer than many investors expect and market peaks or troughs only become evident with the perspective of hindsight,” he said.
When a bear market begins its cycle, investors need to rely on their long-term goals instead of their emotions when they decide how to rebalance their retirement portfolio. Pullbacks in the market should be viewed as opportunities to purchase securities at lower prices.
“For investors who are in it for the long haul, time in the market is much more important than timing the market,” Jennings said.
A minor short-term pullback occurring in the market is definitely a plausible option and could be warranted, said Edison Byzyka, vice president of investments for Hefty Wealth Partners in Auburn, Ind.
“Whether it's the end of the bull market, however, is something that can be extensively debated,” he said.
Reallocation of Assets
For investors who are more risk averse or believe that the bull market is ending, allocating their assets toward more defensive sectors such as utilities and health care, could be good approach, Byzyka said.
Despite the fear of rising interest rates, having exposure to traditional fixed income as well as Treasuries with a five-year maturity could also be another option, he said.
“The most important thing to keep in mind in times of potential volatility is that trying to time the market, either on the upside or downside, is a sure way to derail any long term investment plan,” Byzyka said.
Gen X investors as well as Millennials should not fear a decline in the market and instead embrace the volatility by looking for discounts in equities since they have the “luxury of investing in the market for many years to come, which means more upside is very possible,” he said.
All Bull Market's End
Since all bull markets end eventually, being mentally prepared for its eventuality is the best course since they tend to stop in a “period of heightened euphoria,” said Bijan Golkar, CEO of FPC Investment Advisory in Petaluma, Calif.
“You should always be in a portfolio you are comfortable with so you can ride out the storm of a bear market,” he said. “Gen X and Y have a long runway ahead of them so it is important to learn this lesson early. You would not want to be the one who sits in cash for 20 years.”
--Written by Ellen Chang for MainStreet