On Tuesday, the Dow Jones industrial average, one of the most popular measures of how the stock market is doing, closed at an all-time high. Then it kept going up on Wednesday. And on Thursday. And again on Friday, catalyzed by a better-than-expected jobs report.
The headlines were screaming. The pundits were chattering. But, what does the stock market being on a tear mean? As one reader puts it: “When the market surges, a lot of people think they’re supposed to … do something.”
If you want more insight on why the markets are doing so well, we have background on the Dow’s record-breaking surge. In the meantime, we want to explore: When markets go drastically up (or down), how should you react?
We spoke to Carl Richards, author of “Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money” and regular New York Times contributor, as well as LearnVest Planning Services certified financial planner Sophia Bera for advice.
Your Starting Point
“First of all,” Richards says, even before the market reached these new highs, you should “have an investment plan that was carefully thought out when you were thinking rationally.” This will include a mix of, for instance, stocks of large companies, stocks of small companies, stocks from international companies, bonds and other types of investments. And the amount you have of each would be tailored to your goals and time horizons—or the amount of time you can leave your money alone to grow. (Wondering what mix is right for you? Check out our risk tolerance quiz.)
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Second, this plan of yours should be not be based on short-term targets, but on goals at least five years out. (We’ve talked before about why day trading is a bad idea.) If you’re constantly adjusting your investments for what’s going on around you—i.e. “oh, emerging market stocks are doing well, I should get more of those”—you’re likely to run into problems.
For the sake of this article, let’s assume that you have an investing plan that’s well-thought-out, and that you’re in the markets for the long haul, whether for retirement or another distant goal.
What You Should Be Doing
“If you have a plan, the question becomes, ‘Should I change my plan based on what’s going on with the market?’ The answer is no,” Richards says. “Should you keep making contributions to your 401(k)? Yes.” After all, your plan isn’t any less good just because the market is doing well. Richards adds, “Generally speaking, we should make changes based on changes in our lives, not based on changes in the market.”
When a person decides to trade because of a stock market surge, it’s because he thinks he can predict where things will go in the future. For example, he might want to cash out before stocks plummet, or get in now because he thinks they’ll only go higher. But any such decision assumes he knows something no one else does.
If you find yourself thinking this way, Richards recommends pushing yourself: “Okay, if you know the market is going to go down, when will that happen?” You probably can’t answer with any real certainty. “The only thing we know is we had a plan that reflected our goals, and our goals haven’t changed.”
What About Being Strategic Within My Investing Plan?
You might be a long-term investor, sure, but if you’re just buying an index fund that reflects the stock market, shouldn’t you try to buy it on an optimal day if you can?