Partying Till It Drops : Investors Can Get Careless When a Bull Market Appears Endless

“Let the good times roll” is not an investment strategy.

Yet with a reasonably healthy economy and six years of bellowing bull market on our minds, a lot of people are feeling invincible, acting as if the party will go on forever.

Intuitively, investors know good times will not last forever, but they make investment decisions based on their experience. For many people, that experience is limited to the ‘90s.

“People are making decisions based on everything being positive, because they have never seen any real negatives,” says Judith A. Shine of Shine Investment Advisory Services, an Englewood, Colo., financial planning firm. “We don’t know how long this can go on--maybe for a long time--but it’s easy to get careless when you think the good times will never end.”

So what mistakes are born from prosperity?

* You’re spending more money.

When the financial plan assumes 10% annualized long-term returns and your portfolio produced double that in the last year, you feel flush with cash. So it’s tempting to go out and buy a new stereo system, car or vacation.

“People get deceived by how well they are doing on paper,” says Roy L. Komack of Komack Management Services Inc. in Natick, Mass. “They take out money for something special and figure they are still ahead and don’t realize what they have done to their portfolio. Their long-term return projections were made assuming there would be big years and bad years, and they will need the gains from the current times to make up for years when they don’t have those returns.”

If you don’t want to make the financial belt uncomfortably tight during any future downturns, don’t overspend now.

* You’ve made moves because you’re worried about what’s going to happen in the next 30 or 90 days.

No one denies there will eventually be a stock market correction and some period of anything from no gain to big losses. Still, it’s easy to blow a fuse on your long-term planning if you let short-run concerns dominate your thinking.

In late June, for example, the stock market began a short, swift decline. Fearing that this was the end of prosperity, some investors backed away, selling successful investments and heading for the safety of cash.

And then the market rebounded, surpassing all previous highs.

Oops.

The twin devils of every investor are fear and greed. Just as it’s a mistake to take on too much risk by being overly aggressive, so is it dumb to let fear mess up long-term investment plans.

* You aren’t paying attention.

For most investors, the idea is to achieve a balance between riskier holdings offering fast growth and safer holdings designed to protect capital. In the current market environment, that balance has been disturbed; the fast-growth holdings have risen more quickly than the conservative portfolio.

“People forget to trim their winners and rebalance their portfolio so that it stays on course for their goals,” says Diahann W. Lassus of the advisory firm Lassus Wherley & Associates in Providence, N.J. “They don’t protect their gains and go off their plans and wind up being more vulnerable to a downturn than they need or want to be. Everyone should see if their portfolio needs to be rebalanced at least once a year.”

Also, maybe you have reached a goal earlier than you thought.

“Someone who was saving for their child’s college education in 1990 may have it paid for by now,” explains Ross Levin, a principal with Accredited Investors Inc. in Minneapolis. “Yet things have been so good they want to keep going. Now, instead of risking that their money won’t grow fast enough, they are risking that they could lose the money right as they actually need it.”

* You shy away from under-performing asset classes and over-exaggerate recent top performers.

Some investors say they know their portfolio needs to diversify, but they can’t pull the trigger on buying anything but the hot asset classes.

“Everyone wants to believe that it’s different this time, that the assets they just bought will never go out of favor,” says David H. Diesslin of Diesslin & Associates in Fort Worth. “Success breeds complacency, and investors who simply throw everything they have at what has worked lately probably aren’t preparing themselves for whatever is coming next.”

Charles A. Jaffe is the personal finance columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, P.O. Box 2378, Boston, MA 02107-2378.