I am continually amazed by the huge number of thoughtful and apropos quotes that concern investing.  I’ve been writing and editing our quarterly newsletter, Portfolio Insights, for more than 15 years and I can still find plenty of great quotes without too many repeats.

While I enjoy a great quote, I can’t say that any of them rise to the level of being an investing philosophy to live by, except one that jumped out at me when I first saw it years ago.

Sir John Templeton, a legendary investor and international markets pioneer, said, ‘Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.’

This quote seems particularly appropriate to me because I believe that, in the past few months, we’ve shifted from the second to the third phase of the bull/bear cycle that Templeton posits.

The current bull market was clearly born in the pessimism of the 2008 financial crisis.  I can vividly remember the grim outlook that pervaded at the time.

During the eight years that ended in December, the S&P 500 grew at a compounded rate of 14.4 percent, but was still described by many as the most hated bull market in history.  To me, this period could aptly be described as growing on skepticism.

Since the election last November, markets have rallied sharply as investors are understandably excited about President Trump’s pro-growth agenda that includes tax cuts, fiscal stimulus, and deregulation.

There are several indicators that show the enthusiasm, including the historically low implied volatility index (VIX), high consumer sentiment readings and something as simple as the Dow Jones Industrial Average (DJIA) crossing 20,000.

This optimism, while refreshing, probably marks the shift into the third phase, maturing on optimism.

I want to be clear, though: while I think that markets are likely to mature on optimism in the coming years, I don’t believe that we are particularly at the euphoric stage where the bull market dies.

If you weren’t investing in the late 1990s as I was, it’s hard to understand true euphoria.  That applies to real estate in the mid-2000s too, albeit to a slightly lesser extent in my opinion.  I don’t think we’re in an environment like either of those.

Even though I’ve said that stocks are overvalued for about three years now, I could see this rally continuing for some time, probably measured in years.

While I’m somewhat worried about today’s high valuations, I thought the same thing three years ago, and the S&P 500 is more than 30 percent higher today than it was then.  Valuations could go higher still, but they may come down too, as earnings get a boost from the President’s pro-growth agenda.

Like my article three years ago, I’m not suggesting gloom and doom or saying that people get out of the market.  I simply want everyone to have reasonable expectations about future returns and make sure that we’re all as mentally prepared as we can be for when volatility picks up again.

As always, the best defense is to ensure that you’re comfortable with your stock/bond allocation and maintain a well-diversified and well-balanced portfolio.  That’s pretty much what I said three years ago and it’s as true now as ever.