Talk of a bull market may be exciting, but you may want to temper that a bit. Here’s why: Even if the market’s overall value soars, that doesn’t necessarily mean your investments will make money.
Take as one example the early part of 2023, when the S&P 500 index rose 20% over the previous year. A 20% gain sounds great. But one problem is that in 2022, the market hit such lows that this year’s gains aren’t doing much more than helping to recover last year’s losses.
In other words, that bull market is simply taking many investors back to their break-even point. And maybe it’s not even getting them back to break-even.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Plus, when you delve into the specifics of a bull market, you may discover that a very small sector of businesses is driving almost all the upward motion, and you may or may not be invested in that specific sector.
A handful of tech stocks at the top
Let’s look at a recent example. In the spring of 2023 as the stock market rallied, a small group of tech stocks was responsible for most of the S&P 500’s gains. If your money was invested in most other stocks — as a well-diversified portfolio should be — not a lot was happening in your overall portfolio values. You may have been scratching your head, wondering why you weren’t sharing in those incredible market gains that you were reading about and hearing about in the news.
This point was driven home recently when another index, the Nasdaq 100, had to do a “special rebalance” because it was out of compliance with the U.S. Securities and Exchange Commission’s rule on fund diversification. Just seven companies accounted for 55% of the weight in the index. They were Microsoft, Apple, Nvidia, Amazon.com, Tesla, Alphabet and Meta. The concern was that this handful of companies was distorting the health of the market, and balance was needed to correct that.
Imagine if just one or two of those companies had a poor quarter or a poor year; the entire Nasdaq index would be disproportionately impacted. The purpose of an index is to spread risk among many companies, so when any company or companies consume too much of the index’s weight, the SEC requires adjustments to be made.
As you can see from these examples, bull markets can sometimes be misleading. At the time I am writing this (September 2023), if you equally weighted the 500 stocks that compose the S&P 500, they are up less than 4% for the year. Yet, the overall S&P 500 is up 17%.
Some suggestions for what to do instead
If you are beginning to deduce that you should be wary about the emphasis that gets placed on a bull market, you are correct. But what should you do instead?
Here are a few suggestions:
Study the broader market. People often focus on the S&P 500, but there are other stock indexes to look at. Each has its own advantages. By examining them, you can get a bigger and clearer picture of the market overall. The Russell 2000 index is a stock market index that measures the value of 2,000 smaller companies. Many mutual funds and exchange-traded funds are based on or tied to the Russell 2000.
Another stock index is the Wilshire 5000, which tracks almost every publicly traded company in the U.S. That arguably makes the Wilshire 5000 the best benchmark for comparing returns.
Look at longer-term performance. Don’t get fixated on the fact that a stock has performed remarkably well since a particular date. Let’s say a stock’s value has grown astronomically over the last seven months. That’s wonderful, but what if you went back eight months? Or a year? Or five years? What does the performance look like over the long haul?
That longer time line can give you a better picture of how well the company and its stock have historically performed and whether what is happening in the moment might be an anomaly.
Give more attention to avoiding big losses. Big losses hurt more than big gains help. Why is this so? Because a percentage loss cannot be made up by gaining back the same percentage. Let’s say you have a $10,000 investment and take a 25% loss this week. That drops your investment to $7,500. But next week, the market rallies and you gain 25%. Are you back to your original $10,000 investment? No, because 25% of $7,500 is $1,875, which brings you to $9,375. You are actually down $625, even though you lost 25% and gained 25%.
Now, let’s say the timing was reversed and the 25% gain came first. Your $10,000 investment would jump to $12,500, a $2,500 increase. But then comes the 25% loss, which would cost you $3,125. You are back to that net figure of $9,375. Indeed, big losses hurt more than big gains help in calculating overall returns.
Be especially careful if you are in retirement. Those big losses create a double whammy if you are in retirement and withdrawing money from your investments for living expenses. Losses on top of withdrawals can cause a portfolio to evaporate quickly. This is why, as you near retirement, it’s a good idea to revisit your portfolio and consider reducing some of the risk.
Keep things in perspective
This doesn’t mean you should stop pulling for a bull market. But you should keep things in perspective and remember that bull markets — especially ones driven by a small portion of the S&P 500 — could be giving you an inaccurate impression of what the overall market is actually doing.
The better handle you can get on what’s happening, the better your decisions will be. You can do that on your own, but it’s also a good idea to find a financial professional who can provide guidance and help you keep tabs on the bigger picture.
If you’re going to join the excited bull-market chatter, you should at least truly know what it is you’re excited about.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
142.08
related content
- AI Has Powerful Potential to Make Investing Decisions Easier
- Want to Get Rich and Stay Rich? Avoid 10 Investing Mistakes
- Nervous About the Markets and Economy? Consider History
- Four Historical Patterns in the Markets for Investors to Know
- Mutual Funds Reality Check: Are You Really Diversified?
-
I'm 60 with $2.8 million saved. I'm miserable working, but I need health insurance until Medicare kicks in. What are my options?The 'healthcare desert' is real. We ask financial experts for advice.
-
Should You Claim Social Security Early or Late? A Financial Adviser Weighs InThere isn't a wrong age to start claiming Social Security, but there are factors that everyone should consider to avoid leaving money on the table.
-
Should You Claim Social Security Early or Late? A Financial Adviser Weighs In
There isn't a wrong age to start claiming Social Security, but there are factors that everyone should consider to avoid leaving money on the table.
-
Three Things Financially Confident People Do, From a Pro Who KnowsIf you have any worries about your retirement future, take back control with these three tips.
-
How Much Do I Need to Retire? A Financial Professional Breaks Down Your OptionsWhat it all boils down to is will you be comfortable in retirement? Some people may rely on formulas, while others just aim for $1 million nest egg.
-
Despite Our Grumbles, America Still Delivers on the Dream: Perspective From a Financial Pro Who's Seen StuffSome of us might complain about the state of our nation (and those concerns are legit), but America still offers unparalleled opportunities and mobility that many people around the world only dream about.
-
When You Need Capital Quickly, Think 'Ready, Set, Fund': A Financial Adviser's StrategyInvestors must be able to free up cash to meet short-term needs from time to time. This strategy will help you access capital without derailing your long-term goals.
-
I'm an Estate Planner: Moving Family Assets to a Safe Haven Abroad Could Be a Huge Headache for Your HeirsIn troubled times like these, wealthy clients may seek financial refuge outside of the U.S. But that could cause more tax and estate problems than it solves.
-
Fall Is Tax Time? Yes! Act Now to Make Needed AdjustmentsReview your withholdings, contribute to tax-saving HSA and FSA accounts, manage a bonus' impact and adjust for major life events such as weddings and job changes.
-
Board Service in Retirement: The Best Time to Join a Board Is Before You RetireMany senior executives wait until retirement to take a seat on a corporate board. But making this career move early is a win-win for you and your current organization.
