Our clients at Aegis have heard us say it for years: we cannot expect returns from our investments without having to withstand volatility.

We can now add a caveat to that: “except when we don’t.” 2017 is now in the books as the year the market gave us returns without volatility.

Charlie Bilello over at Seeking Alpha has greater detail if you’re interested, but suffice it to say we’ve never seen a year like 2017.

The U.S. stock market has enjoyed numerous years with returns in excess of 2017’s S&P return of 21.7%. What we’ve never seen is the way in which that return was obtained: almost totally without any downside volatility. December, 2017 marked the S&P’s 14th consecutive month without a monthly decline. That’s never happened before, and we have data going back to the early 1920s. Even within those months we rarely had a day (fewer than 5%) with a gain or a decline in excess of 1%.

So instead of a market melt-down we have to deal with a melt-up.

Stocks marching ever upward without pause or downside volatility are a challenge to investor emotion or behavior. Everything we preach about investor behavior gets stood on its head.

It’s like having a party where all the guests drink to excess, only now they actually are getting smarter, funnier and better-looking as they do.  The guests who only had a drink or two now feel foolish for their prudent behavior. They feel like they’re being mocked and ridiculed by the inebriated masters of the universe.

The only danger here is that some of these masters are about to get in their cars and go home. This is where things can get ugly.

Some examples of this behavior include:

1. Going into debt for the sole purpose of buying more stocks.

2. Ratcheting up the stock allocation, even though you don’t need to own more stocks to meet your goals.

3. Going into 2018’s version of the Upside Down: crypto-currencies.

If history is a guide (after I just spent several paragraphs on the limits of history) money will be flowing into stock funds in 2018.  This makes nearly 10 years since the bottom of the 2007-09 Great Recession and many stock funds will lose that period of data from their 10 year track records.  All of that of course would be great if you happened to own a Time Machine and could set the controls for March 6, 2009. Instead most investors look at what’s just happened and buy into it after the fact.

An implicit aspect of “buy and hold” is that it’s a lot more holding than buying. It means resisting the temptation to sell in melt-downs but also resisting the temptation to buy into melt-ups. No one knows how long the party is going to last, but sooner or later it’s going to be morning again. Step back away from the bar and pour yourself a cup of coffee instead.