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How to Invest in the Late Stages of a Bull Market

Annalyn Kurtz

In his spare time, Mark Struthers, a financial planner based in suburban Minneapolis, is a runner and triathlete. So too is his son, who is a bit newer to the sport, and the two men sometimes train together.

"One of my biggest jobs is to mentally prepare him for things he has not actually experienced," Struthers says. Things like heat and humidity, a crowded transition area, being kicked in the face during the swim or how to eat properly if the race is at 4 a.m.

In some ways, it's a lot like preparing for the next correction in the stock market, he says. For many investors, particularly the youngest ones, it's all about mentally preparing for a new and unfamiliar scenario.

"Many younger clients have never really experienced a market correction," he says. "Even some clients in their 40s have never really experienced a correction, having little market exposure in 2008 and 2009. Most of their savings have been built over the last seven to eight years. Many had just got done paying off student loans and starting a family when the recession hit."

[See: 7 ETFs for a Solid Portfolio Defense.]

Financial advisors repeatedly tell Main Street investors not to bother trying to game the market, and they're right. Study after study show the deck is stacked against both individual investors -- and even professional fund managers -- who try to consistently beat broad market indexes like the Standard & Poor's 500 index.

"No one can predict the ups and downs of the markets with any degree of accuracy, so a person's best bet is to invest and stay invested with a plan for a long-term outcome," says Mark Morley, a financial planner based in Tulsa, Oklahoma. "The time to make a plan is not when the market is falling or racing but rather before these events occur so you aren't surprised when it does happen."

But what about all the hemming-and-hawing about a potential market correction this year? Stocks soared in 2017 and seem to be reaching record highs, day after day. Take, for example, all the excitement when the Dow Jones industrial average topped 25,000 at the beginning of January, and then reached 26,000 just a week later. Surely, the upward momentum and euphoria cannot go on forever. And if that's the case, what are regular investors to do?

First, try to reckon with the idea that at some point the market will go down, but when that eventually happens, one of the worst things you can do is react emotionally.

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"The last thing you want is a client pulling funds out of the market because they were not mentally prepared," Struthers says.

Second, assess your risk tolerance and time horizon for investing, and then make sure you hold diversified investments that are allocated accordingly. It's possible your portfolio may need to be rebalanced between stocks, bonds and cash, given the large run-ups in equities over the last few years.

"Research is clear that portfolios do best if they are adjusted to client needs and life changes than to market predictions," says Wes Shannon, a financial planner in Fort Worth, Texas. "If an investor has a 20-year horizon (most do), stay with the portfolio you have to serve that need. Bull markets do end and start again, while bear markets do come and go, but over a long period time it makes little difference."

If you're young and investing for the long term, you'll probably want a portfolio that's weighted more heavily toward stocks than bonds. That shouldn't change, regardless of whether we're in a bull or bear market. If you're older and nearing retirement, it may be time to transition to lower-risk assets.

Either way, once you have a well-diversified portfolio in line with your risk tolerance, there should be no further need to react -- to either an ongoing bull market or a bear, says Kirsty Peev, a portfolio manager with Halpern Financial.

[See: 7 of the Best Stocks to Buy for 2018.]

"Investors should not be adjusting their plan just because stocks are doing well," she says. "People try to predict the end of bull markets all the time and are consistently wrong. Eventually a bearish naysayer will be right, because market corrections are a normal and expected part of investing. But then markets recover and continue with their long-term trajectory upwards."

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