Bull markets do not last forever. Most investors are going to experience multiple booms and busts over their working lives, which means it is critical to know how to survive the tough times. With just a little bit of patience and understanding, the average investor can navigate a slowing bull market by shifting resources away from growth plays and reaching for dividends, private transactions, and targeted international exposure.
Understanding Bull Markets and Why They Slow
Unless you are a pure-style technical investor, it is very important to understand why bull markets form and why they slow down. Many bull markets are, in any meaningful sense, short-term phenomena reflecting improvements in business conditions; publicly listed companies make more money, which causes stock values to rise along with increases in their intrinsic values.
This period of rising profits cannot be sustained forever, according to well-established economic theory, because higher profits attract more competitors and bid down prices. Of course, bull markets can be created by false signals, such as the Federal Reserve flooding asset markets with too much money, that is not backed up by increasing profits or productivity; such bull markets are bubbles.
Some bull markets can be created on a more sustainable level if Americans increase their net savings, meaning less money is spent on consumer goods and more money is invested in assets, such as stocks. Since the United States has not been a savings-intensive country for decades, this kind of bull run is less common.
All bull markets eventually slow down, whether it is from a slowdown in the rate of savings or an increase in business competition, or in the case of bubbles, a return of sane asset pricing to the market. In the absence of continuous inflation, what some economists call "extended elasticity of bank credit," available for security purchases, bull markets have to come down. It is the sign of a healthy economy when prices, including the prices of securities, fall in real terms because of productivity.
Assuming a market is healthy and business prospects have improved and stabilized, the decline of a bull stock market run should be marked by increased dividends. This makes sense because companies are looking to reward shareholders, who are experiencing slowed growth in stock price, by sharing some profits.
This was exactly what happened in the middle of 2015. After months of growth, the S&P 500 and Dow Jones were at or near record highs. Stock prices started to slow in the run-up to August, but total returns were still juicy because dividends were at four-year highs.
Investors should take a page from fundamentalist giants such as Warren Buffett and look toward solid blue-chips or dividend-focused mutual funds and exchange-traded funds (ETFs). If the stock market is slowing down and stabilizing, or even preparing for a bear period, look to dividends for returns.
Real Estate and the Private Market
In finance terms, "public market" refers to securities, such as stocks and bonds, listed on exchanges. The private market involves private, nonlisted transactions from companies or sellers. Private transactions can range from real estate to private equity secondaries to angel investing.
There are a few kinks to the private market. For one, private companies are often less transparent than public companies. Private market investments are usually far less liquid, which can actually be a good thing and earn you a premium if you do not mind leaving your money with a project for several years. Most importantly, private companies fail more often than publicly traded companies.
These options are especially attractive when interest rates rise. Richard Kaplan, CEO of Chicago-based Syndicated Equities, put it this way: "Interest rates might kill the run, so investors need to be educated on other options available to them," and "interest in private deals affords investors attractive and reliable quarterly returns."
Sector and Geographic Diversification
It is very difficult for the average investor to keep up with the ups and downs of a complex economy. Even top economists struggle to distinguish between real bull markets and bubbles, and nobody can predict the future with certainty. Most investors just want their money to grow over the long term and avoid big losses, which is why it is critical to diversify.
Shorter-term investors need to be more tactical, but the average saver can afford to ride out a slowing bull market by investing in funds with "go-anywhere" mandates or by picking up extra international exposure. Since World War II, the global economy has only lost value in one year, 2009, so there are always places to find returns.