5 Things To Do Before The Bull Market Ends

David Goodboy's picture

Thursday, October 25, 2018 - 2:30pm

by David Goodboy

We are in the midst of one of the greatest bull markets of all time. But, as the cliche goes, all good things must come to and end.

Consistent stock market gains have resulted in complacency among many investors. In my many years of investing and market observation, I have never experienced a bull market like the nearly decade-long one we're in now.


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In my mind, there is no question that the market is way overdue for a sharp plunge -- one that doesn't rebound like the drop we saw earlier this month. A variety of factors could bring the bear market we're all watching out for. Any number of unexpected events could throw the markets into chaos.

No one knows when or how the present bull market will end, but one thing is certain: it will end eventually. And the market plunge will likely be dramatic and account-destroying.
  

So what can you do to prepare for this eventual reckoning? 

1. Evaluate Your Portfolio
You should be doing this at least once a year anyway -- but today's bullish run has made this critical process even more important. 

Take the time to look closely at each of your holdings. Ask if they have hit your target price, are they performing as you expected, and most importantly, would you buy the stock now? If not, it may be time to take profits.

The process of taking profits and reinvesting the proceeds is known as rebalancing. Selling your winning stocks and reinvesting the proceeds into bonds or stocks that have lagged the market (but still have solid fundamentals) is often a smart decision.  

2. Check Your Diversification
Are all your eggs in one basket? Have your gains been due to just a few stocks or a single sector? If this is the case, it's time to spread the risk in preparation for a possible selloff. 

Sell your largest gainers and reinvest the proceeds into a diversified portfolio of stocks, ETFs, and bonds. You should even consider going outside of the traditional investments, with allocations to global stocks, real estate, or even currencies. 

Despite what some experts would lead you to believe, all stocks are correlated to a degree. Owning a pure, stock-only portfolio can be a great thing in massive bull markets. However, once the bear raises its ugly head, things can go bad quickly, even if you're diversified across many sectors/stocks. 

Using your stock market gains as a tool to build a truly diversified investment portfolio is a very shrewd move regardless of what happens in the overall economy. 

3. Watch Your Leverage
Being overleveraged in a bear market is dangerous. Remember, leverage is a double-edged sword, it can destroy the same account balance it helped build when things turn south. 

Be sure to reduce the margin used in your stock investing account. Also, wise investors also will cut back on personal leverage when forecasting a bear market or economic slowdown. Not only can over-leverage destroy your investments, but it can also harm your personal finances if the unexpected happens.


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4. Reevaluate Your Risk
The easiest time to take a close look at your risk level and risk tolerance is after significant gains. Trying to do so after a series of losses only leads to clouded judgment and the urge to quickly make up losses.

Now is the perfect time to reconsider your risk. If you are sitting on large gains from the bull market, slash your risk levels now. This can be done by cutting back on leverage, as mentioned previously, selling more speculative stocks to purchase utilities and other long-term, blue-chip names, or simply reducing your exposure to the stock market as a whole.

5. Prepare Cash Reserves
The silver lining in any bearish scenario is that stocks will be much cheaper after the bottom falls out. Those with cash on hand will be able to snap up these bargains while the majority will be complaining. Sell some stocks to build your bear-market buying power.

Risks To Consider: No one knows when the bull market will end. Using the strategies above, while conservative, may cause you to miss out on upside gains. There is always a give and take when investing. Risk and reward go hand in hand.

Action To Take: Take a close look at your portfolio with the above five factors in mind. Are you prepared for a possible bear market?

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.