Money Matters What to Do When the Stock Market Soars

Many investors find themselves with a terrible dilemma. Burned by a market crash, they sat on the sidelines as the market rose, vowing never to buy stocks again. Months later, they started to question that decision. Every day the market seems to hit a new high, and they reflect on all the gains they’re losing. Meanwhile, their bonds, certificates of deposit and other “safe” investments don’t even return enough to keep up with the cost of living.

They find themselves facing an agonizing choice: Get back in the market and possibly lose money again, or continue to watch from the sidelines as their bolder friends and neighbors rack up a fortune. Fortunately, there are some ways around this problem if you’re willing to do some research. Here are some of the best:

1) Realize that market timing is a fool’s game. The stock market is the greatest wealth-creation system that’s ever existed, but trying to invest at the very top or the very bottom is impossible, even for the so-called experts. If you have a long horizon (and you should not be in the market if you don’t) the ups and downs will eventually even out and leave you with a lot more than you started with.

2) Realize that a rising market doesn’t mean a total dearth of good investments. In nearly every market, there are stocks whose price is unreasonably low. Maybe the company was hit with a lawsuit or had a bad quarter and investors over-reacted. The trick is to do enough research to distinguish between the company that will bounce back and the one that’s going down the drain. Focus on finding the one or two bargains in a frothy market, and hold some of your funds back for a day when stocks are cheaper.

3) Take advantage of sector slumps. In spite of a crazy-hot market, investors recently had a chance to buy gold and gold stocks at the lowest prices in a long time. Within a day, however, prices started to bounce back. By being alert and buying what’s out of fashion, you can still make money in a hot market.

4) Take advantage of dollar-cost averaging and dip your toe into index funds. Dollar-cost averaging means buying a fixed dollar amount of stock at fixed intervals. By doing this, you automatically buy less when the price is high and more when it’s low. By combining this strategy with an investment into a low-cost index fund, you gain market participation with relatively little risk. Broad-based index funds tend to be less volatile than individual stocks or sectors, so you’re less likely to get clobbered in the event of a big drop. The key to making this strategy work is to grit your teeth and keep on investing when the inevitable drop comes. By doing that, you’ll accumulate lots of shares at low prices and be sitting pretty when the market starts to rise again.

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