Financial

by Jack Lantis

To say the current bull market has pleased many investors is probably an understatement. But has it lulled investors into a trance?

With leading stock-market indices showing double-digit returns for the last several years, some investors may be mistaking the bull market for investment brilliance.

During good times, we often get complacent and forget to pay attention to changes in the underlying quality of our stocks. Other investors ignore risk and begin trying to time market moves or react to today's headlines.

A bull market can make investing appear easy, but it often conceals problems with poor investment strategies.

Investors are often caught off-guard when the market turns downward and stock selection becomes more difficult. With that in mind, here are five warning signs you can use to avoid getting trampled by the bull market:

1. Panicking on market Pandemonium. Although issues such as the Asian economic crisis can cause a lot of concern, long-term investors know not to react to the latest headlines or market moves.

Instead, successful investors remain focused on the quality of their individual investments and monitor any changes in a company's performance.

2. Having unrealistic expectations. With such attractive stock-market returns during the last several years, many investors are beginning to think these golden gains will continue indefinitely.

Unrealistic expectations can cause panic investment decisions when prices fluctuate, which can ultimately derail your long-term financial goals. You should temper your performance expectations and develop a proper mix of investments to prepare yourself for inevitable market fluctuations.

3. Ignoring risk. During a bull market, investors may not assess the risk factors of investment decisions as seriously as they should. Yet, the first step to developing a portfolio is to determine how much risk you can afford, both financially and emotionally.

You may be able to emotionally handle owning a high-risk stock, but can you financially afford the consequences if the worst happens? Remember, risk is always present even in good markets.

4. Following the herd. Herds stampede. They do not slow down for fundamental analysis or rational advice.

Investors following the herd can become intoxicated with the sizzle and overlook the substance. Just because you hear about a hot stock, it doesn't mean it's a hot idea for your needs.

5. Keeping all your eggs in one basket. Diversifying your portfolio is one of your best defenses against industry-specific developments that can surprise even the most experienced investors.

Sometimes even the good companies that fail to meet earnings forecasts even by just a few cents are unfairly punished by the market, creating unrealistic expectations.

The list of companies affected by this shoot-first-ask-questions-later mentality is long and distinguished, so even if you hold quality company stocks, it's important to diversify your stock holdings to reduce the overall risk to your portfolio.

Today's good market may be hiding bad investing habits. Take time to review your investments and make sure they're still on track to ride out the bull.

(Jack Lantis is an investment broker with A.G. Edwards & Sons Inc. in Springfield.)

[[In-content Ad]]