The recent market run throws up more questions than answers for investors.
The pandemic has yet to ease, businesses are still in deep financial trouble, and numerous jobs have been lost.
And yet, the market has risen more than 20% from the lows hit during the March crash.
Thing is, investing is as much about psychology as it is about cold, rational analysis, making it fascinating, yet oddly difficult at the same time.
Academics who focus on purely the technical, accounting aspects of investing are missing the point.
After all, the stock market is made up of the collective actions and decisions of millions of participants.
We are confronted by another dilemma today as markets rise.
Did you miss out on the new bull market? How should you react now?
Decoupling from the real economy
Throughout history, we have witnessed instances where the stock market has run ahead of the real economy.
During the depths of the Global Financial Crisis back in early 2009, the world was still struggling to pick up the pieces after the global financial system threatened to collapse.
Even as arguments were being made as to whether the economy could recover, the stock market made astounding gains after bottoming out in March 2009.
Later on, it was established that the economy had bottomed out, and that “green shoots” had already begun to peek out.
In short, the stock market’s performance had pre-empted the real economy, sometimes by as much as six months to a year.
This kind of decoupling is fairly common as economic data is always historical and backwards-dated, while the stock market is embedded with a forward-looking bias.
Pace your purchases
When we view today’s stock market from this perspective, the sharp rise from the depths reached back in March 2020 does make some sense.
Investors should not be fret over whether they have “missed the boat”.
The important thing to do is to continue to pace your purchases as it is impossible to time the market perfectly.
It is also not advisable to constantly compare current valuations and price levels to the troughs reached in March.
Doing so may prevent you from continuing your purchases in a steady, disciplined manner.
After all, valuations are still not excessive if you consider that businesses are only just recovering from the sharp hit from the pandemic a few months earlier.
Keep some cash handy
Although we cannot reliably predict where the market is headed, it makes sense to be prepared.
Keeping some cash handy is useful when it comes to seizing opportunities should the market correct or crash.
Investors need to remember that markets do not go up in a straight line.
The nature of markets is for them to gyrate up and down, even though the underlying business may remain stable and consistent.
By remaining steadfast and setting your investment goals right, you can take advantage of these periodic mood swings to increase stakes in quality companies.
Get Smart: Adopt a long-term business view
Remember too that bull markets generally last much longer than the average bear market.
If a new bull market has indeed started, you should have more than enough time to participate in it.
Because of this, investors need not suffer from “FOMO” or “fear of missing out”.
Such an attitude may lead you to frantically buy up shares using all available cash, leaving nothing left should the market go through a correction.
Adopt a long-term business view and an investment horizon that is measured in years, rather than months,
Once you achieve this, you will stop worrying about whether you have missed the bull run, and instead start to focus on ways to own more great companies.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
