A secular bull market rises more than other bull markets, but both are similar. Recognizing the characteristics of secular bull markets, and using a conservative approach to building your diversified portfolio, will help you invest with confidence.

Secular bull markets take a variety of shapes. Stock prices still go up and down, of course. But the key difference with a secular bull market is that each new upward thrust takes the market to higher peaks than those of the preceding rise.

The post-World War II market rise ran from the late 1940s through the late 1960s. It was a highly rewarding period for investors who followed a conservative, fundamentally based approach like ours. Another secular bull market took place from the late 1980s through around 2007. It was also a profitable time for investors who followed an approach like ours.

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One signature characteristic of a secular bull market and the faulty rationale for trading

In a secular bull market, “they’re no longer cheap” is a particularly insidious rationale for selling. As we’ve mentioned, most stocks are cheap at the start of a secular bull market. As time passes and the rise continues, investors get more confident. A virtuous circle develops. Investors are willing to pay ever higher prices for earnings, sales and improving prospects, and this leads to higher levels of earnings, sales and prospects, pushing investor confidence and stock prices higher still. Eventually the fun ends, of course, but conservative investors tend to underestimate how long it can last.

If you sell when stocks are simply “no longer cheap” (or are “fully priced,” as a broker might put it), you might well miss out on a lot of profit.

One telling characteristic of a secular bull market is that the stock market generally outdoes investor expectations. It seems to shrug off bad news and rises higher and longer than most investors thought likely.

Your best investing approach for dealing with a secular bull market

During a secular bull market, stock prices still go through bear markets (downturns of 20% or more, say). The difference with a secular bull market is that the rising phases within it generally last longer and go higher than people expect. Also, the falling phases, or bear markets, take a smaller toll on stock prices, or end sooner than people generally expect. Most important for investors, few stocks move in lockstep with the market indexes. The best stocks in the next bull or rising market will begin rising before the next bull market gets started.

My view is that an approach like ours will almost inevitably pay off. But the payoff is likely to be greater and arrive sooner in a secular bull market. The problem, however, is that secular bull markets can tempt even the most conservative investors to stray from our proven approach and take on greater risk.

Your best course, in my view, is to stay positive on the long-term market outlook, and stick with our three-part Successful Investor approach. That way, you’re likely to get a good return on your investment portfolio over time.

Practice a long-term conservative approach in all markets—including a secular bull market

Conservative investing is an investment strategy that involves a focus on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of blue-chip stocks and other low-risk investments. A conservative investing approach also means building a well-balanced portfolio gradually, over time. The number of stocks in your portfolio will depend on where you are in your investing career.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meagre profits or losses.

Unsuccessful investors can still make some profits. They just don’t make enough to offset the inevitable losses and leave themselves with an attractive return. If you focus on the idea that you never go broke taking a profit, you may be tempted to sell your best investments whenever it seems the investment outlook is clouding over.

On occasion, you may succeed in selling just prior to a major downturn, and buying back at much lower prices. More often, prices will soon hit bottom and move up to new highs. If you buy back, you’ll pay higher prices. If you had followed this strategy with Canadian bank stocks, for example, you could have missed out on some big gains over the years.

In hindsight, market downturns are easy to spot. Spotting them ahead of time is much harder, and impossible to do consistently. After all, if you could consistently spot market downturns ahead of time, you could acquire a large proportion of all the money in the world, and nobody ever does that.

The problem is that you’ll foresee a lot of market downturns that never occur. All too often, the market-downturn clouds disperse soon after skittish investors have sold. Good reasons to sell do crop up from time to time, of course, even if you follow a long-term conservative investing approach. But “You’re never go broke taking a profit” is not one of them. 

What type of market have you had the most success in: a bear market or a secular bull market? 

What advice would you share with a novice investor about selling a stock too soon in a bull market?