As I’m writing this, the Dow Jones Industrial Average has set a record high for three days in a row. The mainstream media is going nuts. And — like everybody else who has money in a 401(k) or other stock accounts — I’m feeling pretty good. Who wouldn’t?
In investing, the goal is to buy low and sell high. So it’s a good time to sell stock.
But we younger investors are just starting to invest. We have far more buying to do than selling. Most of us – if we’re not investing mostly for retirement – are sticking money in stocks for longer-term goals that are still many years off. So despite the market’s current high, most of us don’t have a reason to get out of the stock market.
What about making more investments? Lots of people use March and April as a time for financial “spring cleaning”. We may want to invest tax refunds. And there’s the April 15 deadline to contribute to an IRA.
I saw Jim Cramer on “Today” earlier this week advising people that “now’s not the time to invest in the stock market”. That’s the one-size-fits all sound bite that people want to hear. But it’s not the whole story.
Certainly, if you’ve been sitting on cash waiting for the “right time to get into the market”, this isn’t it. But if that’s the case, you are trying to time the market and your strategy is misguided. We simply don’t know if this week is the highest the markets will go for a long time or it is just the middle of a longer-term bull market.
So when the stock market is up:
Do make scheduled investments
If you were planning on investing a tax refund or making an IRA contribution in April, do so anyway. Don’t let market movements keep you from sticking to your financial plan.
Do rebalance your portfolio
How you allocate investments in your portfolio among asset classes (stocks and bonds, mostly) is one of the most critical factors in your investing success. Although we may not need to liquidate stocks anytime soon for income, the market’s recent success means the value of stocks in our portfolio has risen in relation to other holdings.
If you’re trying to keep a ratio of 80 percent stocks and 20 percent bonds in your portfolio – a good benchmark for young investors – that may have shifted to, say, 85 percent stocks and 15 percent bonds. That may not seem like a big difference, but when the market retreats some, moving that five percent from stocks into bonds should have a positive impact on your overall returns (you’ll reduce losses on stocks and, because historically bond and stock prices move inversely, you’ll hopefully gain some on the bonds).
If you have stocks in taxable, nonretirement accounts, selling some may result in taxable capital gains. If the amounts are significant, it’s worth a call to your financial advisor or tax advisor before you sell. Rebalancing your retirement accounts, however, is a no-brainer. In your IRA or 401(k), you don’t have to worry about capital gains taxes if you sell some assets that have appreciated.
If you haven’t already checked it out, Personal Capital is my new favorite tool for getting an x-ray of my portfolio’s holdings — especially useful if you have investments at more than one brokerage.
Don’t jump into stocks because of the hype
For regular readers of this blog, this may seem like obvious advice. But judging by the number of people opening brokerage accounts and asking if now’s the right time to “get into the stock market”, it’s a necessary caution. It’s the wrong reason and the wrong time to invest.
The right reason to invest is to reach your goals: retirement, a new home, going back to school. The right time to invest is when you have the cash to do so.
That’s my two cents.
How do market rallies influence your investing decisions?