My client conferences this quarter have a decidedly different tone to them than in years past. I’ve been doing this now for 18 years, and have met with clients during dot-com euphoria, post 9/11 depression and Great Recession angst. While everyone seems to be enjoying the financial honeymoon brought by the first days of the Trump administration, no one has expressed the belief this is some sort of bull market-breakout that will push equities up another 10, 20 or 50%.

The most common sentiment among clients is confusion: no one claims to have seen any of this coming. Most have stated that they expected the great run of stocks in the Obama era to have ended. It is difficult to expect the 235% return of the S&P 500 in the Obama era to persist; yet from election in November to date that is exactly what has happened.

This deviates from the normal temperature of client beliefs. It is human nature to place greater emphasis on what has just occurred versus long-term history (recency bias). Attention spans and short term memory seem to have a shelf life of roughly 18 months. The average investor on the street believes that whatever has happened in the last 18 months is all that is ever going to happen.

We see this in mutual fund flows: the asset classes that have done the best in the last three years receive the majority of money flowing in. Of course, times change and generally some other asset class does the best for the next period, and the funds move on. It’s a sick pathology that leads persons to buy high and sell low: not an optimal strategy for building wealth!

After a while of working with us, clients begin to understand this phenomenon better and it becomes less of an issue. Rebalancing a portfolio is not saying we know which asset classes are going to tank (or rise up) or when, it’s a judgment that markets are cyclical and it’s impossible to see the changes coming before they happen. It is an act of humility.

If this is the beginning of a breakout (also known as a “melt-up”) that will still be good for clients rebalancing out of equities. Selling 10% of your position leaves 90% of the position there to grow! A truly diversified portfolio may have 8-15 asset classes represented at all times.

It is possible to be long-term optimistic and cautious in the short term. Having that mind set and acting with humility towards it is generally the best way for clients to grow their portfolios and live the lives they want without regret.