The purse was on a tear. Here’s how to invest safely

For investors who arrived before the last boom, this translated into some pretty healthy gains. the Dow (UNDUE) jumped about 1,784 points, or 6.1%, between January 15, 2020 and January 15, 2021. S&P 500 (SPX) increased by almost 14.6% and Nasdaq (COMP) 40.4% during this period.

Wall Street has largely ignored the pandemic and political turmoil, while near-zero interest rates, stimulus packages and vaccine rollouts continue to fuel investor optimism.

Have a game plan

Let’s face it, the market is often unpredictable, but that doesn’t mean you have to be.

“Investors may understandably be reluctant to invest money in markets that are close to all time, believing that they might be able to buy the investment at a cheaper price once the market cools down.” said Michaela McDonald, Certified Financial Planner at Personal Finance app Albert.

McDonald’s suggests an investment method called cost averaging in dollars. It basically means investing the same amount of money on a recurring basis no matter what the market may do.

“It helps you focus on what you can control instead of the unpredictability of the market,” McDonald said.

Stick to index funds

But jumping on the bandwagon of an action that has already had a major stroke can be misguided.

“The last thing you want to do is buy an investment that is trading at an all time high and has little wiggle room,” said Leyla Morgillo, certified financial planner at 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 get some exposure to some of the more popular stocks and bigger companies, while spreading the risk over the entire market. .

Avoid emotional investments

When a market boom hits, emotions can run high. But now is not the time to give in to your FOMO or worry about missing out. Instead, use this opportunity to assess your financial goals, assess your tolerance for risk and balance your portfolio investments.

One solution is to diversify your investment portfolio in a way that gives you somewhat limited exposure to the stock market so that you can profit 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 equity investments, and could act as a buffer in the event of increased market volatility, Morgillo said.

These investments can include dividend paying stocks, cash, bonds and real estate.

“It can be very easy to get carried away by the euphoria of a stock market boom and lose sight of reality or behave irrationally,” she said. “It is always wise to use stock market booms to reduce investments that have appreciated significantly and use them as an opportunity to rebalance 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 this go to your head.

Behavioral finance shows that “overconfidence bias” in investing can lead to poor investment decisions and attempts to time the market.

“You don’t want to let market highs make you take more risk than you can afford,” Morgillo said.

Stay prepared

Sometimes investors may not be so lucky, noticing a stock market boom once it’s too late. But you can still prepare for the inevitable next rally to come.

Milo Benningfield, a chartered financial planner and founding director of Benningfield Financial Advisors, recommends “determining what your financial goals are, learning some investment basics and developing an investment plan.”

And once you do, he says, write it down and stick to it.

“If you do that, you will already be way ahead of the game.”