In the past week, there has been no shortage of good news for equity investors.
The American economic expansion just became the longest in history, surpassing the 1990s boom, which lasted a decade.
U.S. employers added 224,000 jobs in June. (Robust hiring indicates that domestic growth will power ahead despite weakness overseas.)
Unemployment is historically low. Business and consumer confidence are up, as are corporate profits. The Federal Reserve stands ready to cut short-term rates if necessary.
And the trend is most definitely our friend. Both the Dow and S&P 500 just hit all-time record highs.
Oxford Club Members, in particular, have much to celebrate.
After all, we have ignored what former vice president Spiro Agnew famously called “the nattering nabobs of negativism” and been on the right side of the market for more than a decade now.
It’s not just that we have locked in literally hundreds of profits since the bear market bottom in March 2009.
We’re also sitting on gains of as much as 129% in our Oxford Communiqué Ten-Baggers of Tomorrow Portfolio, 309% in our Oxford Trading Portfolio, 453% in our Oxford All-Star Portfolio and 466% in our Gone Fishin’ Portfolio.
However, my purpose today is not to suggest that Members start backslapping and high-fiving each other.
Quite the opposite, in fact.
If financial history teaches us anything, it’s that when investors feel like thumping their chests, it is generally a time for greater caution.
More than three decades as an investment analyst, portfolio manager and financial writer have shown me that contrarian instincts are rare.
Investors become paralyzed by fear in a down market and – even if they don’t bail out and run to cash – seldom put money to work in undervalued assets.
The opposite scenario plays out in a long-running bull market like this one.
Rising share prices foster complacency. They also intensify regret, as investors realize they should have put more money into stocks much sooner.
Having missed the bottom and a big part of the run-up, they try to make up for it by shoveling fresh money into the market.
I’m not suggesting for a moment that this is the top for stocks. This bull market could continue for months or years.
It could also end next week. (Admittedly, that seems unlikely with the economy and major indexes doing so well.)
No one will know when this historic bull market is over until we’re looking in the rearview mirror.
Now is a good time, however, to look at the big picture.
Start with your asset allocation. How much do you have in equities vs. bonds? Would you be comfortable with that allocation in a severe downturn?
In your stock portfolio, have you divided your money among growth and value, large caps and small caps, and foreign and domestic names?
Do you have too much in any single stock? A big outperformer can eventually make up a large percentage of your portfolio.
Have you diversified into real estate investment trusts (REITs), Treasury Inflation-Protected Securities (TIPS), and a hedge like precious metals or gold shares?
Do you have trailing stops in place behind your individual stock positions? They protect your profits in the good times and your principal in the bad ones.
You may have had regrets about using stops in a long-running bull market. You will not have them in a long-running bear market.
Have you been an aggressive put seller these past few years? Selling puts in a rising market can feel like a license to print money.
But having tens of thousands of shares put to you at sharply higher prices can wipe out those gains in a hurry.
Don’t get me wrong. Stocks are not particularly overvalued at 17 times earnings. And I’m still finding no shortage of opportunities in today’s markets, both here and overseas.
But it never hurts to stop and consider your asset allocation, your diversification, your option strategies and your sell disciplines.
The best time to prepare for the next market uptrend is in a market downtrend. And a historic bull market like this one is a good time to consider the investment implications of the next bear.