Bull markets are wonderful.
Investors get richer. Mistakes get glossed over. Corporate America expands, and folks feel smarter. This one could last a lot longer, but it will, without question, end someday. When bull markets last for a number of years, it feels normal to make money. Stock investors smile more, look a little smug at times and believe that they're pretty smart.
Peter Keefe at Avenir Corporation told me years ago that there are only two types of investors: those who have been humbled and those who are about to be. The longer the period between humblings, the more painful the next hat-eating can be.
Unemployment numbers remain high in spite of 8.1 million unfilled job openings. Part of the cohort not applying for those jobs are my fellow baby boomers who are deciding that they have enough and will retire.
I'm worried about these folks because they are making decisions based on portfolios valued at all-time highs. This is one among many insidious traps of record high valuations.
Have you looked at your recent brokerage statements? Pretty good, huh? What pandemic? Whenever you look at your statement, pay attention to the "unrealized gains" number. Subtract about a third of that figure to determine the after-tax, real money value of your account.
Looking back a few years, portfolios have done very well: $1 million portfolios invested in the S&P 500 are up more than $100,000 since Jan. 1. That's an above average year in just five months.
A client called recently to ask advice. He was considering buying a $3 million slightly used jet. He said that he calculated the costs for one full-time pilot, fuel, storage, maintenance, and insurance and that he thought he could "pull it off."
What did I think? I love being a cheerleader for my clients' goals and dreams, and it's no fun being "mean Michael." So, I said, "Great. I'm sure your numbers are reasonable, but here's my question: You can imagine how cool it will feel to own your own jet, but can you picture how you'll feel if the market drops 30% and takes three years to recover? Will you feel foolish? Will you feel like a jerk? Will you be stressed out of your mind?"
When markets are high, it's intoxicating to extrapolate recent strong returns and imagine how much money can be made over the next five or 10 years. It's an old mistake. It's born of short memory and complacency. Investing is like swimming in the ocean: It's wonderful on balmy calm days, and it's easy to forget about the dangers of undertow and rogue waves.
The current bull market feels like the path of least resistance is higher. Next year might be strong, too. Earnings estimates for the S&P 500 for 2022 are up more than 15%. Clear sailing? Maybe for a while. Before you buy the third home, new expensive car, join a new country club or make a big charitable pledge, remember – this, too, shall pass.
—Michael K. Farr is a CNBC contributor and president and CEO of Farr, Miller and Washington.