Bull Market Investing: There's Good, and Then There's Great

Bull markets can be best summed up, in the words of former Federal Reserve Chairman Alan Greenspan, as “irrational exuberance.” Investors are usually caught up in the market rallies and in their portfolios' movement from red to black almost overnight. However, the dazzling green ticker symbols hide a very ugly reality: the fundamentals of making prudent investments are ignored. Investors are concerned only with making stratospheric gains, which are more often than not unachievable. Expectations become, as Greenspan famously said about the housing market bubble, irrational. 

The Difference between Good and Great

One's portfolio can be doing well because a select few positions have increased in value even while the rest have declined. A great portfolio, though, has all its assets working in conjunction with one another, is diversified and is taking advantage of the various opportunities in the market. The old adage "Don't put all your eggs in one basket" resonates even more during a bear market. Concentrating investment in one stock is very dangerous, but it is common for an investor caught up in the repeated positive news on a stock to do this. In order to truly reap the broad reach of a bull market, one must not only keep a well-balanced portfolio with different components but also re-balance at least once a quarter. Re-balancing is crucial because it helps with keeping hard-won profits and tax efficiency in place. Dividends and capital gains are taxed in different ways, and with new legislation in the pipeline in 2010 to change the taxation structure, it is even more important to ensure that one does not end up with investments that will generate huge tax liabilities.

Ways to Stay Wealthy and Wise

Staying diversified is one way to create and maintain wealth. However, there are other steps during a bull market that will keep a portfolio together. Being aware of how much risk one can stomach is always a good way to keep it together. During bull markets, investors often forget how much risk they can take in their portfolios. During the tech boom of the 1990s, 401Ks were very heavily weighted towards technology-related investments, many of which have yet to recover and probably never will.

In addition, lack of due diligence is also prevalent during these times. Companies with no cash flow or sustainable business model can see their share prices skyrocket, only to come crashing down. This was witnessed with some of the dot-com companies; they saw huge rises in their shares during the late 1990s but experienced a crash in 2000 that lost investors billions. In order to make an informed, well-defined investment decision, one should employ common sense above all else. Reviewing portfolios on a frequent basis; partnering with professionals, such as an accountant or financial advisor; and even ignoring a good deal of financial news may be the smartest ways to avoid the herd galloping trends.

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