How to Beat Your Bias
Friday marked another banner day for the stock market. The S&P 500 is now up more than 13% so far in 2013…
“That’s like smashing all of 2012’s strong stock market performance into the first four months of this year,” quipped my colleague Jonas Elmerraji on Friday afternoon. “It’s a breakneck pace.”
I know what you’re thinking…
What happens after six months of gains?
You rode this wave higher. You’re sitting on some profits. Now, it’s time for a gut check. The only problem is that your gut’s probably wrong…
Everyone is biased. I am. You are. There’s no way around it. A monster rally will stir a rush of excitement and pure adrenaline in some investors. For others, months of strong gains will leave them quaking in their boots. Instead of buying with both hands, they’re putting an escape plan into action.
No matter how your brain is hardwired, you have to turn to the numbers when your gut tries to take over your buying and selling decisions.
With that in mind, let’s turn back to our big question: What happens after the market marches higher for six straight months?
Believe it or not, it goes higher. The numbers don’t lie…
According to Rob Hanna over at Quantifiable Edges, out of the 14 times the broad market has posted a six month bull run, the S&P was higher 10 months later every single time.
Of course, there were plenty of drawdowns during each of these 10-month periods following the initial six-month winning streaks. But if you held onto your positions, you would have come out of every single situation with gains.
“Based on this, it appears that the bulls should be celebrating that 6-month rally, rather than the bears trying to use it as evidence for an overdue pullback,” Hanna writes.
Sure, it might be counterintuitive. And no—there is no guarantee this time around will produce the same results. But the numbers make a compelling argument that your gut can’t refute.
Don’t get fooled by your instincts. If you hang on now—even through the red months (whenever they decide to materialize)— you will find yourself on the fast track toward some impressive gains.