What Should I Do When the Market's at All-Time Highs?
The FOMO is killing me...
It’s Monday again friends, bonjour! If you’re reading this on email btw, don’t forget about the blog. You can use it to access all our past posts in one place - worth a look if you missed the early stuff on opening an account, asset classes etc.
For all our regular readers, you’ve probably noticed that we tend to take a pretty aggressive (read: bullish) stance on investing here at GYW. It’s because we want to encourage you to start the process *now*. Doing it yourself is honestly the best way to learn, even if you make a couple of bad calls along the way.
However, there are times when you have to put a little more effort and thought into investing that you would usually. We believe this is one of those times, with global stock markets at all-time highs despite the pandemic nowhere close to being done.
Are we saying you should sit out of the market until it crashes again? Nope, not at all. Remember, no one knows what the market will do. What if there’s a successful vaccine announcement soon? We can easily imagine a scenario where that happens and the market puts on a further 20-30%.
What we are saying is, be careful while investing. You want to do that all the time, of course, but it matters even more right now that you pick quality stocks and diversify the scope of your investments. Diversification might look different for different folks, whether that means adding some gold or real estate or bonds to your portfolio.
With that said, what about stocks? What should you do with those?
Buying
As we noted earlier, sitting out of the stock market entirely is not necessarily the right approach - what if things keep getting better?
However, a little bit of prudence at these crazy-high prices doesn’t hurt and it’s an approach professional investors use as well. You should continue to invest in stocks and firms that you believe will do well in the current environment. For stuff you’re less sure about though, now might not be the time to make a punt.
You’re better off saving the big $$ for if/when there’s another correction that appears irrational or fear-driven, whether that’s specific to a particular company or market-wide (although the chances of the latter recurring are low).
That’s certainly not to suggest you should stop investing! Interest rates are extremely low these days, so cash in the bank is getting even worse returns (vs. investing) than it would ordinarily. If you’re unsure in this scenario, going back to basic, vanilla products is never a bad idea. Index tracker ETFs, diversified mutual funds - these tend to be “safe” long-term bets and allow you to save the single stock plays for when prices are a little more attractive.
Selling
In theory, you’re having a much better time if you’re a seller these days vs. a buyer. Prices are elevated and the inflation might help disguise some of your poorer investment choices. However, before you decide to cash in on your gains and sell, it’s worth evaluating a couple of things:
First, will the company or fund continue to do well? Why are you selling? As long-term investors, we encourage you to focus five or ten years in the future. If you think the company will keep growing and performing well, why not hold on and make even more money on it?
Second, can the cash you make from liquidating be put to better use? If it’s a company you’re nervous about (/have made losses on) and you just want to get out of it ASAP, by all means go ahead. If that isn’t the case, however, think of whether you have a better alternative for the cash you make - or if you’re better off just leaving your investment in place.
The worst feeling as a seller is to cash in, only to watch the stock zoom a further 10-15% in the following days. If you own good companies that will continue to grow, try to put your long-term investor hat on and ignore the short-term trade.
On the flipside, if you have bad stocks dragging down your portfolio, you can take advantage of the current euphoria to get rid of them at a higher price than you’d receive usually.
This post is intended to be a sort of sequel to our discussion last week, which focused on investing when things are sh*t. As you’ve probably gathered, there’s never really a “perfect” time to invest but there are definitely periods when you want to buy or sell more than you would in normal times.
The most important thing is not to be fazed and remain committed to adding to your portfolio. We just went through one of the most intense blowups (and subsequent recoveries) in market history - it should hopefully only get easier from here!
Note, these posts are intended as an educational resource and to encourage participation in the stock market. None of our opinions should be taken as investment advice, please speak to a professional for that :)