Missing the Early Bull Market Can Be Costly

The bull-market versus bear-market-rally debate has been going on for a while. A few analysts have been advising caution and riding out the current uncertainty, suggesting investments in gold, TIPS or some fixed income /cash variant. For instance, this Yahoo video featuring John Mauldin has him suggesting that new bull markets go on for years and years (suggesting we’ll have plenty of time to be sure). Thus, it’s better to be a few months late than a few months early.

Here’s what he says:

The great bull markets last for decades, so you'll have plenty of time. Those who bought at "the bottom" in 1974 had to suffer through the rest of the 1970s. So stop sitting on the edge of your seat waiting for that perfect moment to buy and just remain cautious for a while.

Here’s a few data points courtesy of Fidelity:

• While bull markets have often lasted for multi-year periods, a significant portion of the gains have typically accrued during the early months of a bull market rally.


• Within six months, more than one quarter (27%) of an entire bull market’s performance (on average) was already in the books.


• The first 12 months of the average bull market has provided more than 40% of an entire bull market’s price appreciation, yielding on average 45% for investors.


• Those who choose to re-enter after a few months of positive performance—when the climate feels “safe”.may miss a sizable portion of a bull market’s overall gain.

Here's a chart showing the huge returns in the first few months of a new bull market.



Investing from the mid contraction point versus the mid expansion point can lead to very different results.



At the beginning of this bear market, when sentiment was bullish and this was just a bull market correction, charts like this were all over the place, warning investors against trying to time the markets. It’s a telling sentiment indicator that one does not hear too much from the long term buy-and-hold investors. This bear market has been hard on investor psychology.

Stock markets reward investors precisely because the investors are willing to invest despite the uncertainty. Hence the equity risk premium. In fact, if you miss the beginning of a new bull market, investing in bonds will outperform buy-and-hold indexing over the economic cycle.

Market timing is hard! Precisely because you need to get it right twice: knowing when to sell AND when to buy back. Investing for the long term during volatile times like these feels hard. But this is exactly when one needs to be focusing on the long term.

Disclosure: No positions

Comments

[redbaron]

I agree 100%, and while I read John Mauldin all the time, I think he has this wrong. The largest increases do indeed happen in the early part of a new bull market, and missing out on that first move is very costly to investors. Another aspect that this author does not mention, is that low cap value stocks perform better than most other sectors in this early first part of the move, and those stocks (at least the ones I own) on this most recent move have about doubled the increase of the Dow and S&P, which makes missing this move even more serious.

Mauldin is a strong Republican, and I see more and more political overtones in his writings. I would prefer to keep political comments, even subtle ones, out of this discussion, as I see very little to be gained from such. During the previous administration I saw very little in the way of political comments from JM, but now that we have the Dems in control, that seems to have changed. I think his ability to think without some bias is being challenged, and that is affecting his overall judgment on the market.

IMHO, and JMHO

2009 Apr 28 07:15 AM

[Prudent Man CFA]

Of course if you miss a market move all you have is money in the bank during a period of deflation and no business risk.

That is what measures whether or not you want to assume risks.

2009 Apr 28 10:00 AM

[davesilb]

Yea and if you jump in now and it goes back down to test the lows you have gained nothing when the bull market does actually start because you will need the 40% increase just to get back even!! And in reality you just left the 40% you talked about on the table.

2009 Apr 28 01:07 PM

[Fred Voetsch]

An investor has to look at the environment and make choices and then have the descipline to ride them out; hopefully having made plans for various possibilties and unexpected situations.

Simply taking one scenario that says missing out on the first leg of a bull market and basing your investing on that is foolish, at best. One should take all the data available and get the clearest view possible of where they think the stock market and economy will go in the near and long term future.

The author is quite obviously LOOKING for reasons to be bullish and that is his mistake. I listen to a lot of very wise people with hundreds of years more experience (in total) than the author and they almost all suggest that this is not a good environement in which to buy stocks. This is based on Dow Theory, macro economic data and a great deal of historical analysis.

The previous 1 1/2 months of "bull market" only serves to cloud the judgement and a good investor who has been around is much more aware of that than a young person who has only known P/E ratios of 20+ and earnings that always grew, even if they grew based on circumstances that we won't see again for decades such as overleveraging and a huge populace moving through their peak earning years.

My suggestion for the author is to keep using data and analysis to guide you but try to listen to old hands who have been around a long time (I highly recommend both Gene Inger and Richard Russell and they are a good contrast in style) and to broaden your view of financial history. Look at how investing era's last for decades and learn how to spot the changes and what is likely to work in one era versus another.

2009 Apr 28 01:14 PM

[Crashnburn]

Warren Buffet says to be fearful when others are greedy, and greedy when others are fearful. I think its time to be greedy because most of you are fearful. I am about 95% invested in a well diversified portfolio of ETFs, CEFs, and OEFs.

2009 Apr 28 03:36 PM

[Mutual Fund Wealth]

I agree with points in this article as well. It's crutial though that one stays invested in top performance areas of the market place.... See www.mutualfundwealth.com/ for updates.

2009 Apr 28 09:02 PM

[dragonpaw]

Please note the comment; "here are a few data points courtesy of Fidelity." After that, one can assume that this in simply another mouth-piece for the Wall Street machine. We may all wish that this time is like all other recessions and all we have to is follow the numbers. But as a few otherts have suggested, "this time may be different." Since none of us, including Warren Buffet, have lived AND INVESTED in a true depression-like scenario it is difficult to say. The knee-jerk reactions of congress and the new administration have done little to bolster my confidence, pollings aside.

2009 Apr 28 10:31 PM

[Glen L.]

Wouldn't it be nice if we could all make our investment decisions without having to worry about what the government is going to do next? Day after day I watch Bloomberg and other outlets interviewing "experts" from both the private and public sectors who guess what the next Fed chairman or Treasury Sec statement will be, and how to play the markets in response. Extreme market volatility is a direct result of this uncertainty, and it makes it impossible to consistently time the markets.

2009 Apr 28 11:45 PM

[redbaron]

The authors concept is being confirmed again this morning, as this market continues to climb this wall of worry. As a true contrarian, the negative reaction to this article and concept, only show me that there is still alot of money on the sidelines waiting to buy into the market. By the time the general investing public buys into this conept, most of the gains will have been made already, which is the concept the author is trying to get across. The market is never wrong, and the market continues to climb this wall.

At the same time, it is almost May, and one never knows for sure what that will mean. I reserve the right to change my thinking, as any good investor should be willing to do, should the market conditions change, but for the moment, I continue to be long small cap value stocks, long energy, and long stocks in general.

2009 Apr 29 10:24 AM