Ask Colin

Has your investment plan tended to outperform the market the most in the first stage of bull markets, as it did in 2002-03?

No, not necessarily. My portfolio outperformed the market in 2002-03, but there were only three months of bull market in that year. Quite a bit of the gain was made in the first nine months of that year, before the bull market began in March 2003. My investment plan calls for me to start getting involved in the terminal stages of a bear market. This I did, by buying strong stocks (stocks making new highs). In the first full year of the bull market, 2003-04, my portfolio slightly underperformed the market.

Thinking back over earlier cycles, I am not sure that I could claim to outperform the market in the early stages of bull markets. The early stages are often very strong and I will typically not be fully invested until after the bull market is confirmed. My expectation is that I would somewhat underperform the market in the early stages of a bull market.

I sense, though, that my portfolio will do better than many investors, especially the inexperienced ones, because they tend to be much later getting into the bull market, or of even knowing it is happening. Inexperienced investors are always slow getting into bull markets and this is one thing my plan is actively slanted towards – forcing early exposure.

The end of a bull market is also interesting. I will hopefully have cut back my exposure as the last wild days come. My expectation is that my portfolio will underperform the market in the last stages of the bull market. However, the key comes after the turn when the market falls. Then, my expectation is to make a positive return from interest on cash, with only the strongest stocks still being held, while the market falls over all.  

The aim of my plan is to get in early and build exposure when the risk is low and also to get out early as the risk increases. My objective is first of all not to lose money – make a positive return – and then to at least match the long term market performance. That will give outperformance in some periods, but will underperform when risk is high. The only valid assessment of a plan must be over the full cycle.