The Wall Street Journal recently reported that the "U.S. stocks staged their strongest start to a year in more than a decade in the first quarter." The bull market that began in March 2009 has just celebrated its 3^rd birthday..

Dalbar just completed their annual study of the Quantitative Analysis of Investor Behavior (QAIB). The point of this study is to determine how the average investor is fairing compared to the reported returns of the financial markets. Dalbar measures the inflows and outflows of mutual funds to measure the actual returns that investors are receiving. The results over the last 20 years show the average equity investor has underperformed the S&P 500 by an average of -4.32% per year. In 2011, the gap was wider at -7.85%.

The QAIB conclusion: "The gross under performance of the average investor in 2011...displays what has been the case for over 25 years - irrational decisions lead to inferior return." They go on to note: "The poor performance shows that psychological factors continue to harm the average investor and the remedies for these behaviors remain a work in progress."

We bring this to your attention because the average length of a bull market in stocks is 3.8 years. We suggested a year ago that the chances of the bull market reaching the 3^rd birthday were no better than 50/50 but here we are. At some unknown point in the future, our psychological reserve is going to be tested again as the current bull market comes to an end.

Here is what we are doing now to prepare for the next market cycle and help client resist abandoning your investment discipline when the going gets rough:

1. Client reviews - It is important that you make the time to talk to us to compare your current investment allocation to your current appetite for risk and review your progress toward your savings goals.
2. Rebalancing accounts - Without asking you, we are keeping your portfolio on target by selling a small portion of your best performing assets and adding to your positions in the less volatile assets.
3. Market-based vs. Manager-based investing - We continue to favor passively managed market-based funds over manager-based funds. The current bull market has again confirmed that over 90% of the manager-based mutual funds have underperformed their indexes.
4. Institutional vs. Retail investments - Managing the cost of investing is tightly linked to improving performance. The funds we use allow us to keep the internal costs of your investments roughly 70% below the costs of the average mutual fund.
5. Global Diversification - Only a few years ago, international stocks were the best performers. This last year the honors belong to U.S. stocks. No worries because you own them all. This assures that you will always own a piece of the market leaders.
6. Managing volatility - Extreme volatility of stocks accounts for much of the misbehavior of investors. Adding a bond allocation to a portfolio dampens the volatility and increases the likelihood that you will stick with the investment discipline through the tough times. Bonds also provide a ready source of cash for liquidity and to buy stocks when the market is cheap.

After the tech bubble exploded in 2000, the bull market in stocks lasted 5 years. The most recent bear market in stocks closely resembled the 1970-1974 market cycle, the subsequent bull market lasted over 6 years. The last credit debacle ended in 1990, the stock rally lasted over 9 years. The conclusion is no one knows when a cycle will begin or end.

We combine financial planning with investment management because the remedy for "investor misbehavior" is always being prepared for the next cycle before it comes.