“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”
– William Feather
Everyone loves a good bull market (a period of time when stock prices are rising), and we’ve been fortunate enough to enjoy one of the longest bull runs in U.S. history over the past decade.
Of course bull markets don’t last forever. In fact, the first thing that everyone wants to know during a bull market is, ‘when will it hit its peak? When will our luck run out?’ This might leave you feeling like you want to leave your investments alone to let them grow uninterrupted.
And you know what? That’s a great idea!
Trying to time the market is almost always impossible, and staying true to your long-term investment plan is a major key to success.
But with that said, there can also be opportunities available during a rising market for those who know where to look…
Here are couple things you can do to ride the wave of a rising market.
Don’t Let a High Market Scare You.
Just because the market is running high doesn’t necessarily mean you shouldn’t invest in stocks. After all, just because it’s more expensive today than it was yesterday doesn’t mean it won’t be even more expensive tomorrow.
If you look back over the market’s history, you can see that it was “high” many times and many times it has moved higher. If you are investing for the long run, the current level of the market is not that important.
However, be careful of market hype!
More investors tend to buy into the market more when it is high than when it is underperforming. Making investments out of emotion or without going through the due diligence is a good way to lose out on the money you are hoping to make.
Bottom line is if you have an investment plan, then stick to it. Whether it’s buying stocks in an IRA or investing your tax refund, it’s important to follow your plan and continue to think long term.
Don’t Be Afraid to Shuffle Your Retirement Assets.
Great markets often lead to profits, but those pesky capital gains can add up quickly and eat away at your returns.
Why is this important? Retirement accounts are tax-deferred, which means you don’t pay any taxes until you take the money out, and then it is taxed as regular income instead of capital gains.
So a smart trick that investors use in rising markets is to only shuffle around investments that are inside their retirement accounts, thus taking advantage of the profits without having to worry about capital gains!
If you want to capture profits or reduce your stock holdings that have risen, selling inside an IRA is a way to do so without any immediate tax implications.
While these strategy is useful in any market, it’s particularly useful for high markets where the profits are more substantial.
Make Sure You Diversify.
We have absolutely no control over what the market will do. But we have total control over what we choose to own (or not own) in our portfolios.
That’s why diversification is key. Especially when the market is already high.
For example, you might have a portfolio that’s made up of 75 percent stocks and 25 percent bonds. If stocks go up, you could see a shift to 80 percent stocks and 20 percent bonds. It may be a good idea to let that ride for a bit while the market has strength.
However, at some point, going back to your plan and rebalancing back to 75-25 may be a wise move. Just because the stock market is reaching record highs one week doesn’t mean it will keep climbing.
Another danger of high markets is that they can make risky investments look reasonable. Kind of like the guy selling you a used car who warms up the engine first, the problems in these types of investments probably won’t emerge until you’ve held on to them for a while—and then it might be too late.
Sooner or later there will be a downturn, and when that happens your portfolio needs to be varied enough to absorb the impact without losing everything.
“The individual investor should act consistently as an investor and not as a speculator.”
– Ben Graham
Don’t shy away from a high market but don’t get caught in the hype. Stick to your plan and remain focused on your long-term goals.
CLICK HERE to become an Insider! Join my Email Insider Group to receive weekly tips and tricks on finance, education, home buying, insurance, Social Security and everything in between. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances.
© Byron Ellis