The pessimists out there like to tell us investors that a market crash is always inevitable on the stock market. Well, they're not wrong. The stock market as an institution has been around for centuries. Over these centuries, we have seen more market crashes than we can count.
There are many famous examples etched in history such as the 'Black Tuesday' crash that heralded the Great Depression, the 'Black Monday' crash of 1987, the global financial crisis, and most recently, the COVID crash of 2020. Going back even further, we could also talk about the 'South Sea Bubble' of the 1700s.
But here's the thing to remember about stock market crashes: they never last. Not once in history has the stock market, be that of the United States, the United Kingdom, or Australia, failed to exceed a previous all-time high.
As such, we can conclude that, just like the next stock market crash is inevitable, so too is a new bull market.
But just as investors can make mistakes in a market crash, a bull market can also lead us astray. So here are three costly mistakes to avoid during the next bull market.
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3 mistakes you don't want to make during the next ASX bull market
Getting clever
An enthusiastic bull market tends to create pockets of euphoria in the markets after a while. Put simply, investors get carried away with making money and send the prices of certain stocks through the roof for no fundamental reason. We saw this with 3D printing shares in the 2010s, cannabis shares in 2017 and tech shares in 2021 and 2022.
During these times, investors might be hit with a severe case of FOMO (fear of missing out) and might think they are doing something wrong by not piling in. But these rallies almost inevitably peter out once they run too long. And that's something you really don't want to get caught up in.
So remember that the most successful investors tend to stick with their strategies over both bull markets and bear markets. Changing horses midstream on a FOMO-induced whim rarely works out well.
Trying to time the market
You might have heard the phrase 'time in the market beats timing the market'. It is one of the most useful pieces of advice you can hear when it comes to investing. Often, it is used as a caution for investors who might be thinking about selling out of their shares in anticipation of a market crash.
But it also applies to a bull market. If you have faith that a company will continue to be a winner over the coming decades, then there is absolutely no reason why you should try and get tricky with jumping in and out of its shares. Take US tech giant Apple for instance.
Apple is undisputedly one of the highest-calibre businesses in the world. Over 2020, the Apple stock price rose by almost 80%. But if you were an Apple investor and thought it was a good idea to 'take some profits off the table' after this rally, you would have made a big mistake.
Apple proceeded to rise another 34% over 2021, and today stands a good 45% above where it finished 2020 at:
As such, a long-term investor who didn't try and time the market would have done immeasurably better than someone who looked to make a quick short-term buck.
Not keeping to a diversified portfolio
Every investor knows of the benefits of diversification, or not having all of one's eggs in the same basket. Yet an ASX bull market can easily help investors forget about these benefits. Bull markets tend to see some corners of the share market perform better than others.
Growth and cyclical shares like those in the tech, resources, and financials space tend to power ahead, while defensive shares like gold miners or consumer staples stocks will show a tendency to tread water. This can distort investors' decision-making, and prompt them to chase the sorts of shares that are rising.
But following this path can be dangerous. You want a healthy mix of high-quality companies from different corners of the market in your portfolio. Don't forget that and only chase the winners during the next ASX bull market.
