Personal Finance: Investing in an aging bull market
It's not terribly surprising that investors are putting less money into stock mutual funds this year than last—around 30 percent less. History says that bull markets last only 3.4 years on average, and this bull market just celebrated its third birthday three days ago.
For the record, the current bull market was born on Oct. 9, 2002, when the Standard & Poor's 500 index of blue-chip stocks had sunk to a low of 776.76. Since that time, the S&P 500 has shot up above the 1180 level, meaning that stock prices have risen more than 50 percent.
But now comes the hard part: How do you invest in a bull market that looks ready for retirement? Should you even put new money to work in a bull that's starting its fourth year of life?
The answer is yes. To be sure, as bull markets age, they tend to slow down—sometimes considerably. According to Standard & Poor's, the average bull market going back to 1942 has produced gains of 38 percent in Year 1, 12 percent in Year 2, and only 3 percent in Year 3.
However, fourth years (if bull markets make it that far) typically give investors a welcome lift.
"History indicates that if the S&P 500 celebrates a third birthday without a decline, chances are very good that it will live to see its fourth birthday—and even experience a growth spurt," says Sam Stovall, S&P's chief investment strategist. Indeed, the S&P's average performance in fourth years of bull markets is a 14 percent gain.
This doesn't mean that now is the time for investors to swing for the fences. But it does mean they should probably remain in the game. Here are tips for the fourth year of a bull market:
Invest, but invest in less economically sensitive stocks. While it's true that stocks tend to rise in fourth years of bull markets, the best-performing sectors in those years have been healthcare and consumer-staples stocks (think Procter & Gamble or Kimberly-Clark). Healthcare stocks in the S&P 500 have returned 31 percent on average in Year 4 while consumer-staples stocks gained 26 percent. This is probably because such companies tend not to require a strong economy to grow. And by Year 4 of a bull market, the economy has often slowed.
Diversify, diversify, diversify. Standard & Poor's found that growth-oriented stocks and value-oriented stocks have tended to perform about equally in fourth years of bull markets.
Don't limit yourself to the United States. Yes, domestic stocks tend to do well in Year 4 of a bull market. But this doesn't mean they will outperform foreign shares, so including foreign stock funds in your investments would make sense. In the recently ended third quarter, internationally oriented stock funds delivered more than twice the gains of domestic portfolios.