Keep Calm as the Bull Keeps On

Have you ever watched a stunt performer jump out of a speeding car, or a gymnast miss a crucial landing, and wondered, "What would I have done in that situation?" Professional tumblers say the primary rule to avoid injury is to protect your head, followed by stay relaxed.

This can apply elsewhere, including in investing, with the equity bull market in its ninth year and the S&P 500 Index now sitting at around 2,500 points, up more than 250 per cent since the run started, according to calculations made using Thomson Reuters data. Economic recoveries are typically thought to last around eight years on average, or about the length of time since the recovery from the recession in 2008-2009. A correction would be signaled by a market drop of 10 per cent or more.

What drives bull markets and what causes them to end? Good question. The fact is, even experts have trouble accurately predicting how investors respond to certain events, whether it's a presidential election, Brexit or a global recession.

Since there's no crystal ball to tell us all the answers, the decision-making process is up to us. And that means it can be important stay in tune with just what might be influencing some of our investment choices.

Same, Same...

Our biases can sometimes obscure our ability to rationally understand data. That's because of the way our brains are wired. Recency bias for example, is the belief that what's been happening recently will continue into the foreseeable future. Dan Ariely, a professor of behavioral economics at Duke University and author of Predictably Irrational, says we're wired to look for patterns. "If you think about the creation of asset bubbles, that's always what happens," he says. "Things go up and up and up, and we start thinking it has to always go up."

Stock market valuations are the highest they've been in the past 15 years. Depending on who you listen to, we may or may not be in a stock market bubble. However, just assuming the bull market will continue indefinitely could very well be a symptom of recency bias. It's also important to remember that in any type of market, past performance is no guarantee of what will happen in the future.

I Knew It!

Investors can sometimes misinterpret information because of what's known as confirmation bias. It's the habit of seeking out and accepting information that confirms our beliefs, while at the same time rejecting information that contradicts them. Researchers have found that, once an impression is formed, it proves highly resistant to change.

Many studies have shown that investors can hurt their total return by over-trading and acting impulsively. (One of the most famous is a coin-flip study that determined people need to be better educated on how to make decisions under uncertainty.) Experienced investors understand that having a plan and sticking to it, while also staying nimble to take advantage of new opportunities, can be beneficial.

Staying calm and following your investment plan can be tough during whipsaw markets. But "losing your head" during periods of extreme market volatility, or being overly anxious, may just lead to mistakes. Hey, market downturns can happen, but being prepared and learning to roll with them can be useful skills. Just ask a stunt performer.