Investors hate it when stocks fall. But at times like this, when the stock market seems to be moving up in nearly a straight line, you may find it even more challenging to make smart investing decisions.
Later in this article, I'll reveal some tips on putting your money to work even when stock prices are soaring. But first, let's take a look at just how big a move we've already seen.
The bulls have been running
Most investors are aware of the strong start that 2012 has had. The S&P / ASX 200 has risen 6.2% in the few weeks since the champagne corks popped and we welcomed in the new year.
In fact, in almost exactly 5 months, the market has rallied almost 11.5%, up from 3864 points in late September to 4057 on Friday, February 24.
At the same time, many investments have had far more dramatic up-moves than the 6% gain in the ASX 200 since the end of 2011. Horizon Oil Limited (ASX: HZN) has jumped 62.5% since the last trading day in December on positive development news, while Noni-B Limited (ASX: NBL) bucked the retail trend, releasing better-than-expected profit numbers, and the share price has gained 70% largely as a result.
Of course, a summary of recent winners would be incomplete without a business we've written a lot about – Maverick Drilling (ASX: MAD) – a company investors have really taken to in the last couple of months, turning positive news into a 260% increase in the share price.
We've all been well-conditioned not to chase rising markets, as the threat of buying high and selling low is a big disincentive toward putting money to work. Yet as markets churn ever higher, the fear of missing out on an even bigger bull market is a constant temptation to go ahead and invest. So which impulse is right — and what's the best way to act on it?
2 things you can do now
As in any investing environment, it's important to take emotions out of the picture when you're thinking about how to handle a rising market. The emotions involved are far different from those experienced during a market crash, but they can be just as destructive in taking you away from your long-term investing plan.
Rather than making abrupt moves, I try to do two things when markets are soaring. First, I make a shopping list of stocks that I like but that don't pass my valuation test. That way, if a correction does come — and it almost always does — then I'll be ready to pounce.
One example is Sydney Airport Holdings Ltd (ASX: SYD). This monopoly business owns Australia's biggest and busiest airport – and has made an absolute art form of extracting the maximum value from the shopping, parking and transport links at the airport. Perhaps because of its business strength, the former MAp Airports has rarely been cheap, but the current price is just a little too high for me to take advantage of.
By doing research on Sydney Airports now, I can figure out what price I would be willing to pay for the stock. I may never get the opportunity if the stock price doesn't cooperate. But if it does, I'll be prepared, having done most of the legwork already.
The other thing to consider is looking at businesses and sectors that haven't participated in the rally. Retailers are particularly unloved, and some of our better industrial businesses such as Ansell Limited (ASX: ANN), Brickworks Limited (ASX: BKW) and Computershare Limited (ASX: CPU) have missed out entirely on the upswing, each having a lower share price now than they did at the end of last year. That by itself doesn't make these companies necessarily good buys, but there are often opportunities among the unloved parts of our market.
Be patient
Whether you're in a bull, bear, or flat market, the key to smart investing is having a plan. If you know what you'll do next before you see exactly how the markets play out, you'll have a big edge over your fellow investors – and you'll be able to use that edge to profit where others miss out.
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A version of this article, written by Dan Caplinger, originally appeared on fool.com. It has been updated by Scott Phillips
