7 Ways to Respond to Stock Market Euphoria

March 22, 2021

Arguing about whether the stock market is in a period of euphoria or is continuing on in a secular bull market these days isn’t the point of this post. You can read those debates elsewhere. The goal here is to provide you with some tools to respond to persistent highs in the stock market.

  1. Recognize that it doesn’t last forever. Bull markets end. Bubbles pop. Stock market history reveals that markets go up, down, and sideways. Sometimes for long periods of time. The key is not to make knee-jerk decisions, but to engage in thoughtful, prudent investment planning based on a plan and not in reaction to market euphoria or crashes. The enduring goal is not timing sells and timing buys, but consistently investing in up and down markets alike.
  2. Don’t just wait for the crash to invest. Some have not reaped the harvest of gains because they have been sitting on the sidelines in cash awaiting the next big crash. The problem with this line of thinking is that you might be waiting a long time. Furthermore, cash in a low interest rate environment certainly is not beating inflation. Let’s say you’ve been waiting to invest ever since the Financial Crisis, when the crash finally happens are you really going to invest then? For example, in the recent coronavirus sell-off did you get back in or did you wait because you thought it was going to keep dropping? If you are afraid to act when markets are up, why wouldn’t you continue to wait convinced of further market slide and even better prices ahead when all the headlines are apocalyptic and markets are falling? I’m not saying you should be in the market—that all depends on investment objectives, time horizon, and risk tolerance—but you should take time to think through why you are not.
  3. Clean up your own balance sheet by paying off debt and building an emergency fund. While some think cash is king others want to borrow money to invest. In the Great Recession the banking system was in deep trouble. Words like leverage, debt, and lending inside financial institution’s balance sheets became household conversations. A reckoning arrived. Companies failed and balance sheets needed to be cleaned up. Do not wait for the personal or national economic crisis to clean up your own balance sheet by paying off debt and having an emergency fund. There are all kinds recommendations about how much an emergency fund should be and how long it should last. Three months of current income? Six months of expenses? An entire year or two of income and expenses? Don’t get hung up on that. Just get hung up on having one and do what you can to add to it. Start somewhere. Having an emergency fund in place saves you from having to sell your investments at the wrong time or to go into debt.
  4. Gains can be given up quickly. Individual stocks can begin to take up to too much of a percentage of your portfolio. Think about diversifying to other parts of the market that been beaten up and may rebound. It’s easy to stick with what has been working, never selling because of fear of taxes or falling in love with one stock or one sector, but hot stocks have been known to fizzle fast and popular sectors can move out of favor.
  5. Spend some today. This point is especially for savers. There comes a time when savers need to learn to spend. Go on a vacation. Buy that car. Fix up the house. Your money should be saved and invested, but that’s not all its for. It’s also meant to be enjoyed by you and not just saved up for someone else.
  6. Give some away. If you’ve done well, consider donating to those who haven’t done so well. Maybe it’s a family member or friend. It could be a tax-deductible charity or church that serves local, national, or international needs. Here’s another option: fund hospitals or research that is aiming for scientific breakthrough. Find value in what you give not only in what you gain.
  7. Hire a financial advisor. Are you taking on too much risk? Are you saving enough for retirement? Do your investments match your plan? Easy money found in high markets end. Markets don’t always go up. Investing for the long haul is hard. Go to our website and set up a complimentary appointment. It might be that you’re a good match for us and we are a good match for you.