If you happened to be living underneath a rock or doing research in Antarctica for the past year or so, you may have missed an important development in the stock market…we are in a red-hot bull market. The S&P 500 has more than doubled from its recession lows, housing prices are rising fast and unemployment is slowly, but steadily dropping. The good times are here again!
If you’re relatively young, or just happen to be a new investor all this positivity probably feels pretty strange…“You mean, my investment balances can actually go..up?!”
I admit, it’s a bit strange for me as well. I started with my first job in 2007, just months before the bottom fell out of the economy. For the majority of my investing “career” all I’ve known is doom and gloom. In all actuality, investing in a down market is pretty easy. If you stayed calm and rational during this last recession and had the guts to stray from the herd it was pretty easy to find attractive investment opportunities and catch some big gains once the recovery started.
But a bull market is a little trickier. Warren Buffett says: “Be greedy when others are fearful, and fearful when others are greedy.” and the herd is pouring all their money back into the stock market. Greed is definitely back. So what are we supposed to do?
Should we sit on the sidelines holding on to a pile of cash waiting for the next recession to give us buying opportunities? Should we go all-in and hope the good times never end?
Fortunately, we can invest even when greed is rampant in a bull market. Here’s how:
Stay The Course – You have an asset allocation and investing strategy, stick to it. Continue to make your regular contributions and investments. During a bull market your stocks will be rapidly rising in value which will naturally lead you to invest in your more conservative investments so that your portfolio balance doesn’t get thrown out of whack.
Be Cautious – If you invest in individual stocks it’s going to be harder to find companies that are trading at attractive valuations but that doesn’t mean they don’t exist. Don’t go throwing your money around wildly thinking that everything you touch will turn to gold because the market is rising. Take time to uncover stocks that are true values. Europe is still struggling, so looking overseas may be a good place to start searching for diamonds in the rough.
Pay Off Debt – Obviously getting out of debt should always be a priority. But when times are good and jobs are a bit more stable, it might be a good time to increase your monthly debt payments. Getting out of debt while the economy is roaring along will in turn allow you a greater opportunity to save up an emergency fund and better prepare yourself for the next downturn. It always sucks to be laid off, but the pain is only multiplied if you have a mountain of credit card debt and no savings to fall back on. Use the current stability to get ahead of the curve in those areas.
Real Estate – Did you buy a McMansion that you couldn’t really afford back in 2006? Now might be the time to try to look to downsize. Real estate markets are heating up: prices and competition for properties are increasing daily, even in markets that were hardest hit by the housing bust. You can take advantage of the trend by selling your house and downsizing into something smaller and more affordable.
If downsizing is a little too extreme for you, refinancing is still a great option. Interest rates on mortgages are still extremely low and the HARP program is available to help people refinance their mortgage even if it’s underwater (more is owed on the mortgage than the property is worth).
Avoid Lifestyle Inflation – When the economy is in good shape consumer spending starts to rise. That means your friends and neighbors are all out buying new cars and huge new TV’s. Now, more than ever it’s important to remember that most basic personal finance advice and resist the temptation to “Keep up with the Joneses”.
Even though I said we shouldn’t stop investing entirely, a rising market is a time to increase the amount of cash we have on hand so that we’re ready to take advantage of the great buying opportunities that the next down market is sure to bring.
Invest In Yourself – Over the past 4 or 5 years we’ve learned to just be happy that we have a job. Opportunities were scarce so maybe you stopped even considering looking for a better position (I know I did!).
As the job market continues to improve, now is the time to make the leap. Like the company you’re with? Ask for a promotion or a raise…worst case scenario, you don’t get it and you now have more incentive to chase down one of the increasing number of other opportunities that are available out there. If you’ve wanted out of your job for some time, now is probably your chance. Start sending out resumes, apply for jobs that might be a step or two up from where you are now, or jobs that you might not be totally qualified for. As the employee the leverage is starting to swing back into our favor, and it’s our responsibility to take advantage of it for our own good!
It’s easy to get caught up in the excitement of a bull market. Every day you hear about a new record the stock market is setting and you don’t want to be left behind. Everything may seem like easy money but resist the urge to follow the herd. Stay cautious and stick to your investment plan. There is opportunity in every type of market. It’s just that when it comes to stocks those opportunities are a bit harder to find in bull markets.
Patience is your friend. Stay invested, seek out opportunity where you can find it and enjoy the good times. But also remember that neither the good times, nor the bad last forever. It’s fun watching stocks set new records every day, but the people enjoying that the most are those that bought in 2009, not last week. The next recession is coming eventually and you want to be ready for it. Because real wealth in the stock market is made by those who have the guts to buy when everyone else is too afraid, not by those who jump on the speeding bandwagon.
How are you approaching the current market? Are you cautious that it might not last, or optimistic that the party will continue?