Recently, the stock market has been continually hitting all-time highs – for instance, the S&P 500 just clocked in at its highest closing value ever.
When investors see wonderful performance like this, they’re often tempted to change their investment strategy, and you might be too. While it seems like a great idea to take advantage of fantastic market conditions, it can also become dangerous if you make rash and incorrect choices.
With that in mind, here are some useful pointers on what you should do (and not do) when the stock market is reaching new highs:
Overconfidence is dangerous
Studies show that we tend to become overly confident in our decision-making abilities when we see good results. For instance, when the S&P 500 hits a new high (and your portfolio sees increased returns as a result), you might attribute it to your skills as an investor and have a false sense of hubris.
While it’s fine to temporarily bask in the glow of good returns, you shouldn’t let them influence the way you invest. The very reason for your high returns in the stock market is because you stuck to a long-term strategy, and didn’t make rash changes. Don’t let the corresponding results fool you into doing individual stock picking or market timing to chase even greater returns.
Don’t change asset allocations
Your asset allocation is one of the most important investment decisions you can make, because it can largely affect both the risk you take on and the returns you earn. Although your asset allocation is a crucial choice, many investors haphazardly switch it when they see big returns in one asset class, like the stock market.
Although you may enjoy a temporary boost in returns by shifting to an all-stock portfolio, you should know that the stock market ebbs and flows. When the tides turn and the stock market eventually drops, you’ll be stuck with higher risk levels and greater losses than you originally accounted for in your financial plan.
Make a mental note of what happened
When the stock market is at a high, it can be useful to reexamine times when you were previously inclined to sell your investments (or you did partially sell them). For example, was there a period of high volatility when you desperately wanted to sell your stock portfolio? It’s worth noting how much those investments recovered and eventually made, because you might be tempted to have the same knee-jerk reaction if they drop again.
At LexION Capital, we strictly look at the stock market through a scientific, data-based lens. If you’d like to learn more about how we can help you reach your long-term financial goals and needs, contact us today.
