The Dow Jones industrial average just crossed 22,000.
When I started in the financial planning profession, it was dominated by baby boomers. I have listened to many of them talk about the Dow Jones when they entered the business.
Some of them remember when the Dow was less than 100 and a single point change was a big deal.
Over time, I have learned to be grateful for bull markets, but to not trust them.
Every bull market ends in a correction. I have also learned to be optimistic about bear markets. Bear markets are stepping stones to better times.
I have been uncomfortable with this current bull market for a while. This lack of trust may prompt the question of why is this market continuing to rise at such a fast pace.
You can think of a bull market as a giant battleship. Once the engines are off, the boat’s momentum keeps it moving forward.
One thing makes this current bull market both unique and dangerous is government spending.
To prop up the economy during the credit crisis in 2008, the federal government began borrowing and spending money at alarming rates.
For years, the federal government has been adding a trillion dollars to the national debt annually to keep the economy going and go it has. Are we now in a bubble?
After bubbles pop, faux experts blather to the world that they predicted the bubble and then proceed to sell their books or investment systems.
Bubbles are hard to foresee. But if I had to guess what the next bubble is, I would wager it is a government spending bubble.
Bubble or not, this current bull market will eventually end. What can you do to prepare?
There are many ways to prepare and handle a bear market. Some of those strategies are very sophisticated, but some are much simpler.
Diversification should be the first level of defense. A significant drop in the stock market won’t hurt as much if you don’t have your entire portfolio in stocks.
It is important to remember that some investments have a high correlation to stocks. Proper diversification means low correlation.
Using defensive stocks is also important. Defensive stocks are usually labeled as such because they tend to perform better during bear markets.
A few examples of defensive stocks would be utilities and food companies, among others. When the market struggles, people may not take a nice vacation, but they will pay their electric bill and eat food.
Good dividend paying stocks may also perform better during tough markets. When a stock pays a strong dividend and the share price drops, the dividend becomes very enticing.
As long as the company continues to pay the same level of dividends, the dividend can act as a floatie.
Someday this bull market is going to end. Until it does, enjoy the ride.