While the long-term trajectory of the U.S. stock market has always been up, a lot can change quickly in the short term. Case in point: After a particularly choppy fall, the S&P 500 (an index often used as a benchmark for overall market performance) is up more than 10.5 percent so far in 2019.
Wondering how upswings like this should affect your investing habits? Here are three money moves to make when stocks are on a tear.
In a hot market, it’s easy to develop a too-sunny outlook on high-growth stocks. (Think: the popular FAANG group: Facebook, Amazon, Apple, Netflix, and Google.) “But overconfidence can lead to poor decisions, like pouring a ton of money into a single stock,” says Cary Carbonaro, Certified Financial Planner and author of “The Money Queen’s Guide.” That doesn’t exactly make for a diversified portfolio and sets you up for big losses if that stock’s performance drops in the future.
If you’ve already been investing regularly in a diversified portfolio, stick with it. And if you haven’t, it’s a good time to start. (That’s a good move whether the market is heading up or down.) By investing a set amount at regular intervals, you’re practicing what’s called dollar-cost averaging, allowing you to buy more shares when prices are low and fewer at high prices.
This habit can also help buffer against any rash and potentially harmful financial decisions, too. “It takes the emotion out of investing, so you’re less likely to be swayed into buying or selling at inopportune times,” Carbonaro says.
When the market’s soaring—and our investment account balance starts to climb, too—we tend to feel optimistic about our net worth. That’s not a bad thing, unless it triggers us to loosen our purse strings a little too much. “In behavioral economics, this is called the wealth effect,” Carbonaro says.
So be mindful of what prompts you to spend and make an effort to rein in any lifestyle inflation. If you haven’t already, creating a simple budget can keep you on track.
As a rule, it’s wise to review your investments once or twice a year to maintain a healthy level of diversification. “After significant market movements, you’ll find that one asset class [like stocks or bonds] will be up and another will be down, throwing your ideal mix out of whack,” Carbonaro says. “Review your portfolio and adjust as necessary to get back to your original allocation.” That may mean selling some of one kind of investment like stocks, and adding more bonds so that you maintain the same mix you initially chose for your portfolio.