The stock market is notoriously unpredictable. The one thing investors know for sure is that taking a nap during a bull run can be costly.
When the market is on a strong bull run, many investors want to believe it will continue indefinitely in an upward direction.
We all know that the two statements we can count on are:
- The market goes up
- The market goes down
Unfortunately (to paraphrase an old market cliche), we don't always know when the market will reverse direction.
When the market has had a good run, it is tempting to assume a pullback (as investors take profit and selling drives down stock prices) is just around the corner.
This is a good assumption, but it may tempt you to get out of the market early when there are still legs under the bull.
An equally dangerous and erroneous assumption is that the market will continue moving in the same direction indefinitely.
In March of 2009, the market was at the end of a dive that began in the fall of 2008. The major indexes had lost around 50% of their 2008 highs.
If you were in the camp that believed the market would continue falling, you might have been tempted to cash in your chips and head for the safety of fixed income options.
That would have been an ill-timed decision because the markets went on a run that recovered a significant amount of the on-the-books losses.
However, it is equally dangerous to assume a bull market following a significant downturn will continue until all losses are recovered.
The lesson for investors is to avoid assuming the market will continue in the same direction. Change is a constant in the market and investors must be nimble to avoid significant losses or to miss out on significant gains.
