Bull markets, and this one just celebrated its eighth anniversary, have a habit of persuading you that you are smarter than you think. They also have a siren-like ability to throw you off course. In fact, it can be extremely dangerous to your wealth when the band stops playing – and it will.
Researchers have found that the brain activity of a person who is making money on their investments is indistinguishable from a person who is high on drugs. The danger in allowing a bull market to increase your confidence as an investor is that it can lead you to make unnecessary or avoidable mistakes to continue to experience that high.
After a long period of good times and good experiences, we feel falsely secure and confident and forget about risk and danger. Risk management gets tossed out the window by many during a bull market. Why do I need bonds, European stocks, or emerging market equities, you ask yourself, when everything is going so well in the U.S and Canada? You assume that the good times will last forever, or at the very least, you will surely be able to sidestep the next bear market.
Bull markets can entice investors to abandon a good process. Remember, your carefully constructed investment policy is your rudder as you embark on your investment journey. One of the hardest parts about investing is staying disciplined and committed to a consistent process when all others around you are abandoning theirs.
Above all, it is vitally important to stay humble.
While not always easy,humility may be one of the most useful traits you can nurture during a bull market to remind yourself that the good times don’t last forever and you are not as intelligent as rising markets may make you feel.