The US stock market has been on a tear. The Dow, S&P 500 and Nasdaq ended 2020 near all-time highs — and the indexes have kept on climbing into the new year.
For investors who got in before the latest boom, that has resulted in some pretty healthy gains. The Dow (INDU) jumped about 1,784 points, or 6.1%, between January 15, 2020 and January 15, 2021. The S&P 500 (SPX) rose nearly 14.6%, and the Nasdaq (COMP) 40.4% during that time.
Wall Street has largely shrugged off the pandemic and political turmoil, while near-zero interest rates, stimulus relief and vaccine rollouts continue to boost investor optimism.
For those who missed out on the latest stock market boom, never fear. There are steps you can take to get into position well before the next market highs hit.
Here’s how to make sure you’re not missing out the next time around, without taking on too much risk:
Have a game plan
Let’s face it, the market is often unpredictable, but that doesn’t mean you have to be.
“Investors can naturally shy away from putting money into markets that are near all-time highs, thinking they might be able to purchase the investment for a cheaper price once the market cools off,” said Michaela McDonald, a certified financial planner at personal finance app Albert.
McDonald suggests an investment method called dollar-cost averaging. That essentially means investing the same amount of money on a recurring basis, no matter what the market may be doing.
“This helps you focus on what you can control instead of the unpredictability of the market,” said McDonald.
Stick with index funds
A handful of individual stocks have led the charge over the past year, with the strong performances of the big five tech giants – Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google owner Alphabet (GOOGL)and Facebook (FB) – leading the way for the S&P 500 index.
Promising vaccines and other developments in the fight against Covid-19 have also sent shares of some pharma companies, like Moderna (MRNA), and biotech companies, like Sorrento Therapeutic (SRNE), soaring.
But jumping on the bandwagon of a stock that’s already had a major run can be ill-advised.
“The last thing you want to do is purchase an investment that is trading at an all-time high and has little room to run,” said Leyla Morgillo, a certified financial planner with Madison Financial Planning Group.
Instead, you can invest in index funds – baskets of stocks that track a major index, such as the S&P 500 – to gain some exposure to some of the most popular stocks and biggest companies, while spreading out the risk across the broader market.
Avoid emotional investing
When a market boom hits, emotions can run high. But it’s not the time to give into your FOMO, or fear of missing out. Instead, use it as an opportunity to assess your financial goals, evaluate your risk tolerance and balance your portfolio investments.
One way is by diversifying your investment portfolio in a way that gives you somewhat limited exposure to the stock market so you can benefit from market rallies, but you don’t risk putting all your eggs in one basket.
Other investments should ideally be more conservative and behave differently from stock investments, and could serve as a buffer during increased market volatility, Morgillo said.
Those investments can include dividend-paying stocks, cash, bonds and real estate.
“It can be very easy to get caught up in the euphoria of a stock market boom and lose sight of reality or behave irrationally,” she said. “It is always wise to utilize stock market booms to trim investments that have appreciated significantly and use it as an opportunity to rebalance back to your target investment weightings.”
On a similar note, when stocks are up it can often lead to significant growth or winning trades. But experts warn you shouldn’t let it go to your head.
Behavioral finance shows that “overconfidence bias” in investing can result in poor investment decisions and attempts to time the market.
“You don’t want to let the market highs influence you to take on more risk than you can afford,” Morgillo said.
Sometimes investors may not be so lucky, noticing a stock market boom once it’s too late. But you can still prepare for the next inevitable rally that’s to come.
Milo Benningfield, a certified financial planner and founding principal of Benningfield Financial Advisors, recommends “figuring out what your financial goals are, learning some investment basics and putting together an investment plan.”
And once you do, he says, write it down and stick with it.
“If you do that, you’ll be way ahead of the game already.”