What to Do in a Up (Bull) Market?
Here is a summary, followed by a critical discussion of the above post:
The post outlines a cautious approach for investors during a bull market, framing the rising prices as a potential risk that requires action to "counteract the potentially negative effects."
Key Points:
Core Dilemma: While a bull market increases stock prices and provides profit opportunities, it is always followed by a correction that can rapidly erase gains.
Suggested Strategies:
Sell a portion of shares with the plan to buy back after the price falls.
Do nothing and let the market correct itself.
Sell entirely to realize profits.
Recommended Strategy: The post specifically advocates for selling a portion of stocks at high bull-market prices. After the inevitable correction occurs, the investor should use the proceeds to buy back more shares at a lower price.
Claimed Benefits: This approach is said to help avoid losses, increase the total number of shares owned, and reduce the average cost per share.
A critical discussion of the above post.
This post touches on core investment principles but also contains some common misconceptions. Let's expand, critically discuss, and then summarize the original post.
Expansion and Critical Discussion
The original post correctly identifies the opportunity and the central dilemma of a bull market: how to realize gains without missing out on further potential upside. The proposed strategies, however, need deeper context and a critical eye.
1. On the Proposed Strategies:
"Sell a part of the shares to repurchase later at a lower price."
Expansion: This is known as "Taking Profits" or "Rebalancing." It's a disciplined way to lock in gains. The advanced version mentioned later—using the proceeds to buy more after a correction—is a form of "Buy Low, Sell High" in action.
Critical Discussion: The major flaw here is timing risk. A "bull market" is not a single peak; it's a sustained upward trend with many peaks and valleys. What if you sell 20% of your shares, but the market continues to rally for another two years? You have now missed out on significant gains on that portion of your capital. This strategy can lead to opportunity cost and is essentially a form of market timing, which is notoriously difficult even for professionals.
"Leave the market work its way through with no action."
Expansion: This is the classic "Buy and Hold" strategy. The underlying philosophy is that over the long term, quality assets tend to appreciate, and trying to time the market is a fool's errand. For investors with a long-time horizon (10+ years), this is often the most successful and least stressful approach.
Critical Discussion: The criticism is psychological and financial. Watching a 40% gain evaporate to a 10% gain in a sharp correction can be devastating and may cause an investor to panic-sell at the bottom. For those nearing retirement, failing to take some profits in a sustained bull market can be a catastrophic error, as they may not have the time to recover from the subsequent bear market.
"Take advantage of the high prices and sell the stocks for a profit."
Expansion: This implies a full exit, which is different from selling a portion. This is a valid strategy if you believe the asset is severely overvalued or your investment thesis has changed.
Critical Discussion: The same timing risk applies, but even more severely. A full exit means you are 100% in cash. If the bull run continues, you are completely on the sidelines. Furthermore, selling triggers capital gains taxes, which can significantly eat into your returns, especially on short-term holdings.
2. Critical Analysis of the Core Argument:
The post frames a bull market as a problem to be "counteracted." This is a defensive, almost fearful, perspective. While prudence is key, a bull market is primarily an opportunity for wealth creation.
The "Average Cost" Fallacy: The post claims that buying back after a correction will "reduce your average cost per share." This is misleading.
Example: You buy 10 shares at $10 each. The stock rises to $20, and you sell 5 shares. You now have 5 shares and $100 cash. The stock then crashes to $5. You use the $100 to buy 20 more shares. You now hold 25 shares with a total investment of $100 (for the first 10) = $100. Your new average cost is $200 / 25 shares = $8 per share. Yes, your cost basis is lower, but you achieved this by realizing a gain and deploying more capital at a lower price. The benefit came from the successful trade, not just the mathematical averaging.
What's Missing from the Discussion:
The Role of Valuation: The best action in a bull market depends on valuation. Is the market (or your stock) fairly valued, overvalued, or still reasonably priced? Selling a broad-market index fund in a bull market that is not in a bubble has historically been a poor long-term decision.
Asset Allocation and Rebalancing: The most professional strategy is to have a target asset allocation (e.g., 60% stocks, 40% bonds). In a strong bull market, your stock portion might grow to 70% of your portfolio. To counteract risk, you would rebalance by selling some stocks (taking profits) and buying bonds to return to your 60/40 split. This is a disciplined, non-emotional way to "counteract" the risk.
Dollar-Cost Averaging (DCA) Out: Instead of selling a lump sum, an investor could initiate a plan to systematically sell a small percentage of their holdings each month. This mitigates the risk of selling everything at a single point.
The Power of Quality: In a bull market, "the tide lifts all boats," but when it recedes, you see who was swimming naked. Focusing on high-quality companies with strong balance sheets and durable competitive advantages is the best defense against a sharp correction.
Summary
The original post provides a basic, cautious introduction to navigating a bull market. It correctly highlights the risk of a subsequent correction and suggests plausible actions like taking partial profits. Its core strategy of selling high to buy back lower is a classic profit-taking maneuver.
However, the post has significant limitations:
It presents a defensive view of a bull market, framing it mainly as a threat rather than an opportunity.
It heavily implies a market-timing approach, which is high-risk and often leads to missed gains (opportunity cost).
Its explanation of "reducing average cost" is an oversimplification that ignores the mechanics of realized gains and additional capital deployment.
It omits crucial concepts like long-term buy-and-hold strategies, portfolio rebalancing, valuation analysis, and the importance of investing in quality assets.
In conclusion, while the post's heart is in the right place—advising caution—a more robust approach to a bull market involves a disciplined strategy based on personal goals, risk tolerance, and time horizon, rather than a reactive fear of an inevitable correction. The most intelligent investors don't just know what to do in a bull or bear market; they have a plan that works through all market cycles.
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