How to ride a bull in 8 steps
You only live Twice
At a double digit daily average return, it took a few weeks for compounding to work its magic. He became rich overnight. If you don’t have such close friends, lucky you to be able to stay the course.
But for some, FOMO may be hard to resist and forces us to take calculated risks. Not only because the last epic bull market was two decades ago and such accelerating (late) stage phase of a bull market is rare.
By actively participating, you learn how euphoric markets work (assuming this lasts). You may feel what it’s like to be a 12-year old Korean Warren Buffett.
But one needs to be reminded to stay wise, especially now. Potentially compromising your life goals was the real trigger for this post (see rule #7). While this market may feel exciting, the stakes are rising.
And my goal with this website, through hard work over the past months, is to help you make your life a little bit easier. Hopefully by creating long term wealth.
Here are 8 common sense investing rules I follow to Live Twice:
- 4 rules for a life with a bit of thrill (Active bets)
- 4 for long term dreams (Passive portfolio)
One for the THRILL (Active)
#1 Keep Retriever and Doge apart
If you decide to go for active investing, separate play money and goal-based portfolios.
A Golden Retriever really dislikes Japanese Shiba Inus, if only because it reminds him of the 1980s in Japan. Can’t blame him, Doge, ironic as he may be, is probably the worst bet out there.
You don’t want to jeopardize your long term dreams.
Odds are stacked against you, the moment you start making active bets.
If you really need to make them, keep active bets small (I don’t exceed 10% of my assets).
If you are lucky, small stakes will compound, like they did for my friend. You could even make your portfolio barbell by combining all your assets through a Retriever Portfolio and separating from active bets.
#2 Take some money off the table
Timing an euphoric market is impossible. Gradually cash-in the winners.
What made my friend successful is discipline around taking money off the table when his stock was on its way to the moon. Make a simulation – e.g. selling 15-20% at each pre-defined stage can make all the difference. Open Excel – have rules, simply relying on ‘gut feeling’ and keeping things in your head in not enough. Hold yourself accountable.
In a bull market, profit is what’s booked; all else is just potential gains.
#3 Don't be naïve about diversification
Most risky assets are highly correlated.
The markets have two modes – Risk On and Risk Off.
While the latest Bitcoin narrative is digital Gold, my instinct tells me that it has a long way to become one. The next crash may verify my assumption about how differently, for the time being, it reacts to Gold (I suspect Institutional Investors that are pilling in are more prone to the Lindy effect)
The wealth of Elon Musk, Cathie Wood, the Tik Tok kids and value of Doge may all plunge at the same time.
It’s also interesting how certain Bitcoin advocates (amongst them some like Value Stocks) see a bubble in Tesla while justifying crypto levels.
On the other hand, Goldbugs don’t mind when Gold is lifted by low rates but when Stocks mechanically follow the same pattern it becomes a dangerous bubble.
The fact is, most of these assets often move because of the same, single factor.
#4 It's not about your skills
A lot of the prices are shooting up at the same time – IPOs/SPACS or Sectorial ETFs to name a few.
What made my friend successful is lack of trading in and out of stocks, because of fees, tax implications and since most off the jumps happen overnight, which you can’t act upon anyway.
I admit that while we don’t share the same investment philosophy, I’m impressed by how stoic he is, not looking at his brokerage account for entire days as the market value moved by tens, then hundred thousand of dollars. Day trading skills won’t help you – if you really believe in your trade stick with it.
One for the DreamS (passive)
#5 Stick to the plan
Stick to the plan with your long term portfolio.
Don’t let the distinction between play money and investments become blurry.
Having skin in the game is important but even more so is controlling for your risk profile. Think about your risk tolerance.
Keep an eye on asset allocation. Rebalancing is key. You may adopt a threshold-based rebalancing method if your asset allocation gets out of whack. I have written a guide on rebalancing, if this can help.
But if you want to avoid rebalancing altogether, Vanguard recently launched Lifestrategy ETFs in Europe. Alternatively, you may invest though target risk funds like BlackRock’s ESG ETFs.
#6 Keep it simple
If anything, simplify your long term portfolio further. There are only so many things you can focus on.
Asset Allocation is key, but by having “too many irons in the fire”, you may miss the boat on structural changes in the market (e.g. rotation into value or emerging markets) that may take place during a bull market, or even a possible subsequent crash. Remember, some parts of the market are still cheap.
You can also go through the Investor checklist, to make sure you didn’t omit anything in your portfolio.
#7 Don't fall for the ETF trap
If there is one rule that works over the long term in markets, it’s that you either have high prices now or future returns, not both.
I personally feel less confident about sustainability of last decade’s exceptional returns, with each acceleration of the market (World ETFs gained 17% in the last 6 months)
But, it’s the above that really got me worried and inspired this article.
Today’s and Japanese Investors from the 1980s have something in common – a willingness to drop dragging assets, like the S&P 500.
Being a Japanese investor in the 1980s one must have been thinking “The Japanese stock market has been a better investment for many years now. It is reasonable to drop the S&P 500 from my portfolio since it’s a drag on the performance”
The additional issue today is that sectorial ETFs are associated with diversification, giving a false sense of safety.
So was the Nikkei with 225 companies from different industries.
Retirement Portfolio diversification means exposure to different countries, currencies and industries, all at the same time.
One day you may be here
#8 Stay vigilant and prepare for a Bear attack
Remember, prices are supported by narratives. And there are strong narratives supporting current market, which may change leaving place to a more fundamental analysis.
Keep track of your active and passive portfolio. Over the long term, my bet is that the return from your long term portfolio will outperform. Especially, when adjusted for fees, taxes but most importantly, for your precious time.
While riding the bull, prepare for a bear attack, now is the time to do so.
Good luck!
Disclosure: I am long Bitcoin, but do not have any other active positions in the above mentioned investments
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Hi Raph,
Interesing comment in bracket…„e.g. rotation into value or emerging markets” 🙂 Looks like that I’m not the only one attracted by this sin as Emerging Markets and Value looks now „seductive” (especially that Value ETFs give also tillt away from US;)
Of course I do not believe in market timming, also factor timming, especially that it looks like that they make sense only in case of long term approach & discipline….However…do you plan article on factors? 🙂 I’m particulary interested in UCITS i.e. to what extend ETFs in Europe really provide cost effective factor exposure.
Lots of plans, Maciej one step at a time but doing what I can to help 🙂
Suspect EM will come first, though.
Did some in depth research on EM recently. Interesting topic as there is a lot missunderstading e.g. low share in global cap as an argument to invest (vs. financial deepening), high GDP growth (which is already incorporated), very high concentraction in China and few companies (even higher then in DM) etc.
My bottom line was to tilt my portfolio to EM but I justify this simply by higher risk / higher reward profile (no magic)…plus „lower valuation” vs. DM (this is bet).
Ps. If market has a sense of humor maybe Europe will beat S&P500 and EM 😉
Fairly common misconceptions indeed and higher risk/reward, as you say. Tricky to beat Mr. Market 🙂
Dear Raph, what an excellent and timely article. It’s indeed hard holding the course sometimes, especially if suddenly a lot of “new stuff” emerges and woooshes past by us. Thanks for writing this, this is great!
Matt
Thanks, Matt – indeed temptations are strong, especially if your neighbour is getting rich overnight. But one needs to be reminded that a long term strategy is all that matters and controlling FOMO (if we really can’t avoid it) by limiting it to a few % of the portfolio.
I enjoyed this article, even though I no longer make active bets in the market. One thing I especially liked is this line: “If there is one rule that works over the long term in markets, it’s that you either have high prices now or future returns, not both.” What I would add to this is that it is very hard (nay, virtually impossible) to know which of these you are dealing with, which is why a concept like the 4% rule (or as I prefer, the 3% rule) is so useful. When the market inevitably does correct, if you… Read more »
Agreed, Fred and congrats on staying 100% passive ?
16% in 6 months is quite an acceleration indeed
Love the picture, who’s the other (non-korean) kid?
Cheers
Have a look here, heads up… song may get stuck in your head
Good advice! It took me a 1/2 a lifetime to learn this stuff on my own . Keep it simple , no dead weigh holdings … buy the dips
Hi Jonn – exactly, hold a World ETF and invest regularly. That’s the only thing we control.
That’s why I emphasize to keep stakes very small and learn how difficult it is to beat the market. My friend essentially bought a lottery ticket.
You called the top wrt ARKs!