How Do I Handle Investments when Stocks Are Up?
The market returns of 2009 and 2010 have been above average, leading many investors to wonder, What do I do now? Concerns about how to handle a rising stock market is just as prominent as how to handle a declining market. Investment strategies for the current stock market environment may not be as complex as you think, especially if you keep the following investing considerations in mind:
Diversify your investment portfolio: Chasing the latest hot sector may be tempting when the market is rising rapidly: Hot stocks or sectors may grow at 100% or more annually.
The only return you get is from the date you actually invest your money. Past returns are a poor predictor of future results. Keep your portfolio diversified across many sectors, including large-cap stocks, small-cap stocks, international stocks, bonds, real estate, and commodities. This will ensure that no matter which sector is hot, you will take advantage of it.
Keep your investment protections in place: It is very tempting during a rapidly growing market to invest all cash and bonds in that growing market. It's not hard to understand why. The thought of earning 5-6% on cash and bonds when the market is serving up double-digit returns may seem too much to bear.
When the market music stops, you don’t want to be the only one without a seat. Bonds and cash insure that when the market does decline, you have not only a counterweight to keep the portfolio afloat, but also the ability to buy stocks at much cheaper prices. You wouldn’t cancel your life insurance policy just because you are confident you won’t die prematurely. The same philosophy holds true with the safety nets in your portfolio.
Focus on financial markets' cyclical nature: No matter how good the market or the economy looks at any given time, both are cyclical. The market experiences good times that are always followed by bad times. Those bad times are then followed by good times.
Those who invested in the late '90s thought the financial outlook was somehow different. The Internet had provided a technological advance that would ensure continued economic and market growth. This was far from the truth. All this elated thinking did was create an equities bubble that, when finally broken, led to a much larger downside than anyone could have imagined.
Enjoy the ride as markets go up: Financial markets are supposed to go up. Our economy is naturally supposed to grow, thus increasing earning potential and stock prices. This growth is almost never in a straight line; it can be dynamic or gradual in its rise.
Just because the stock market has gone up recently does not mean it's overvalued. If the market didn’t make new highs regularly, it would never grow. Don’t be scared out of riding a growth wave. Remain diversified, keep your protections in place, understand how markets go through rise and fall cycles, and feel comfortable being a part of the market as it runs to new highs.