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How to Invest When the Market's Soaring

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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.

Raging bull
Most investors are aware of the strong start that 2012 has had. But what they may not have noticed is just how smooth a ride up it has been. The S&P 500 hasn't had a drop of 1% or more since Dec. 28, punishing investors who'd gotten used to the "buy on dips" mentality that served them so well in late 2011.

At the same time, many investments have had far more dramatic up-moves than the 9% gain in the S&P since late December. iShares Silver Trust (NYSE: SLV  ) is up more than 27%, for example, as precious metals have bounced sharply from their year-end lows after the combination of Greek worries and continuing low interest rates helped reverse a late-year correction that sent prices to their lowest levels in 2011. Similarly, emerging-market ETFs have soared, with Market Vectors Russia (NYSE: RSX  ) and iShares MSCI Brazil (NYSE: EWZ  ) among the top performers, with roughly 20% gains. Investment analyst Bespoke points out that 94% of ETFs are trading above their 50-day moving averages, suggesting that the markets may have come too far too fast.

Put those two trends together and you end up with a conundrum. 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 raging bull 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 Chipotle Mexican Grill (NYSE: CMG  ) . Unlike other high-momentum stocks, Chipotle's shares have continued to move higher, thwarting short-sellers and their calls for an inevitable correction. Yet even with estimates calling for 20+% long-term growth, its current valuation of more than 35 times 2013 earnings projections is too rich for my blood.

By doing research on Chipotle 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 sectors that haven't participated in the rally. For instance, recently, natural gas stocks have been hurt by the huge successes in new finds, as a glut of natural gas has brought prices down to decade lows, and low-cost gas producer Ultra Petroleum (NYSE: UPL  ) down to multi-year lows. That by itself doesn't make Ultra a value stock -- but if you believe that gas will eventually recover, then it's worth thinking about putting money to work there now rather than buying stocks that have already gotten bid up.

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.

Retirement investing is all about the long run. Let me invite you to read The Motley Fool's latest special report on retirement, where we highlight three smart stock picks for retirement investors. It's absolutely free but only for a limited time, so read it today while it's still available.

Fool contributor Dan Caplinger did a lot of his investment shopping when everyone else was buying Christmas presents. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Ultra Petroleum and Chipotle. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum and Chipotle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy soars with you.

Read/Post Comments (19) | Recommend This Article (108)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2012, at 3:14 PM, mikecart1 wrote:

    I would say I hate a soaring market more than a falling market. This is because nothing is on sale during a soaring market. Even stocks that don't deserve to go up, go up because they are in a sector that is going up. I don't like a falling market either. I'd rather see a market where good sales are rewarded and bad earnings are punished. I would say though to watch what you want to buy and buy them when the market drops but not all at once obviously. Buy in chunks.


  • Report this Comment On February 24, 2012, at 3:55 PM, Borbality wrote:

    moved some index fund money into BRK.B, and moved some cash into Pimco Total Return, as online savings accounts interest rates are now down to about .6%.

    Also moved some cash into the brokerage account in case there's a crash.

  • Report this Comment On February 24, 2012, at 5:41 PM, rebozo2 wrote:

    I'm with the gist of this article. One of Motley Fool's tenets is having a portfolio of 12 stocks minimum (believe the number is correct). Even with the current spike in prices, there are still a number of my holdings (particularly dividend stocks) which are still underwater or near my buy price. I still have faith in them and am using this opportunity to accumulate more; even if they don't skyrocket, the dividends will pay for more; when a desireable high-flier takes a dip, I'll be ready to swoop in; a benefit of diversification.

  • Report this Comment On February 24, 2012, at 8:46 PM, vireoman wrote:

    I'm long on UPL, but keep in mind that while the stock currently looks cheap, the dip will affect that company every bit as much---if not more---than most of the other companies when it comes.

  • Report this Comment On February 25, 2012, at 7:52 AM, oberta wrote:

    In buying stocks I 'm looking at their financial balance sheet and their income statement of at least 2 years. These data such as assets/liabilities resp. net profit, pricearning ratio are the ones which finally supports my decision to buy or sell in a soaring as well in a falling market.

  • Report this Comment On February 25, 2012, at 4:36 PM, bobbyk1 wrote:

    I think the over reaction to earnings still give us great opportunities.NXPI was a good example.Great guide gave us a 41/2% pull back.I doubled my holdings and sold 10% later.PSMT might have missed but a 20% drop was uncalled for.Again I added to my posistion.My favorites right now are FCX and HAL.Great upside.

  • Report this Comment On February 26, 2012, at 6:29 PM, karlm1 wrote:

    Borbality, good choice on the Berkshire Hathaway stock. The higher dividend paying stocks have been chased to unrealistic valuations and great companies like Berkshire have not participated. Its a smart move to avoid the crowd running toward the perceived safety of dividend payers. When the bubble bursts the crowd will follow the rest out and great values will be available again.

  • Report this Comment On February 27, 2012, at 4:47 AM, BuyloPESellHiPE wrote:

    How long is long term? I am in a dielemma, because, I bought my dividend earning equities at all time lows back in 2009. Now I am sitting on a sizeable gain and wondering.......I am trying to follow the cue from Mr. Buffett that activity favors the broker and inactivity favors the investor. I have no idea where I would park my money if I sold some of my equities. I deally I would have liked to replace them with issues that have not advanced but I do not see them. So, right now, my gut tells me Hold Hold Hold and I am. Any thoughts anyone?

  • Report this Comment On February 27, 2012, at 9:16 AM, snickerdoodle9 wrote:

    As a retiree , holding long term means that as long as I continue to see favorable returns from the companies/stocks ( A and B dividends reinvested ) while they continue to promote growth , don't sell them . Non-dividend paying companies ( A and B ) I tend to keep an eye on ( watch the earnings reports ,balance sheets , etc. ) to determine if I should continue to hold or sell .

  • Report this Comment On March 02, 2012, at 2:06 PM, Synchronism wrote:

    @ BuyloPESellHiPE:

    Long-term should be 3 to 5 years. Some people may disagree (I know a fund manager who believes "long term" means 2 to 3 years, while we all know Tweedy & Browne interprets this concept as 10 years).

    However, even if you intend on holding a stock for that long, you should still assess it constantly by:

    1. Monitoring news concerning its business, its industry, and the macroeconomy (assuming beta is high enough to begin with)

    2. Conducting a re-evaluation of the intrinsic value every year or when the circumstances require it, whichever is earlier.

    3. Watching the prices like a hawk, just in case there's a shallow dip you can exploit (applies only if the bull market does not have a strong pull on the company's stock).

    4. Comparing it to other options in the market. You may be forgoing better performance by remaining in your comfort zone.

  • Report this Comment On March 02, 2012, at 2:49 PM, keninden wrote:

    Warren Buffet put it nicely (see Morgan House's article & download Buffett's annual letter):

    "The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply."

    One possibility is rebalancing, e.g. picking up income funds like DODIX in a tax-deferred account. The balance provides some stability, and a reservoir to tap should the market go on sale.

  • Report this Comment On March 02, 2012, at 7:42 PM, ozzie0706 wrote:

    I disagree with buying stocks just because they have not yet participated in this rally. Some of these are stocks which are dogs with fleas. So be cautious.

  • Report this Comment On March 02, 2012, at 11:23 PM, 1022ThirdAvenue wrote:

    @ BuyloPESellHiPE:

    I hear a lot of questions lately about what is considered to be "long-term" when considering an investment. Some commentators think that two to three years is "long-term." Others may view three to five years as being adequately "long-term." To my way of thinking, an investment is just getting warmed up in such short periods of time.

    I view long-term as 12-15 years. To my way of thinking, we will continue to need the following commodities for the long term: petroleum, aluminum, steel, uranium, copper, and wood, amongst a host of others. I am not very excited about lithium, independent of what the current administration in Washington thinks. Thus, I currently have very long positions in AA, NUE, and WY. Soon, I will take a very long position in each of BHP and FCX. Also, I am very long BP, COP, XOM, MPC, MRO; and will soon take positions in OXY and HES. On the boring side, I am long EXC and ED. On the slightly not boring side, I am medium-term CIM and NLY.

    To moderate the effects of both an up market and a down market, I use a very disciplined approach. I know the exact amount of money that I will put into the market each year. I divide that amount by 12, which gives me the amount that I can put in each month. Also, I divide the monthly amount by (N+1), where N is the number of companies that I currently own and the one indicates that I may decide to purchase shares of one company on my watch list. On a monthly basis, then, I allocate the available money according to the following scheme: (1) I buy more shares in each of the companies that I already own, but only if the fundamentals are favourable such as COP is currently; (2) if the funds that were to be allocated are not invested in the current month, I hold the allotment intended for that company until the next month; (3) if one of the companies on my watch list has transitioned into the "vavorable" column based upon fundamentals, then I will initiate a position in that particular company; (4) a company does not make it to the watch list unless it pays a dividend.

    The short-term fluctuations in the overall market, then, have absolutely no influence on the long-term results obtained using this scheme. Two further rules need to be mentioned: (1) even the high-dividend stocks are subject to the aforementioned set of rules; and (2) DRIPs are mandatory for all stocks.

  • Report this Comment On March 03, 2012, at 4:06 PM, 619bell wrote:

    Does any fool think it is not too late to join the party as Liberty increases its stake in SIRI? Why is NOV going in the opposite direction as the market surges?

  • Report this Comment On March 04, 2012, at 10:57 PM, trader350 wrote:

    I took advantage of the soaring market by writing calls $2 above current prices on stocks I own (with low basis) that make sense (I can earn an extra 10% annually by writing the option)

    Covererd call INTC, WY, GE, VLO

  • Report this Comment On March 07, 2012, at 10:41 AM, DJDynamicNC wrote:

    Much harder to find attractive valuations in a bull market; I'm not a fan of soaring markets (my coworkers all laugh because I'm always cheering for the opposite of what they want the market to do).

    Natural gas is an interesting play, and a lot of Fool columnists have been highlighting it. I'm not sold yet; I invest with an eye on 30 to 40 year returns, and I think Nat Gas will run its course well before that time is up (which doesn't mean it's not a solid medium-term holder).

    But I like to fire and forget.

  • Report this Comment On March 08, 2012, at 7:55 PM, daveandrae wrote:

    I disagree with the notion that the market is "soaring."

    Year over year, the s&p 500 is up 3.34% in capital appreciation before dividends. Which is hardly scorching, and i would add, much deserved after sitting through a precipitous fall from 1372 to 1074 over a six month period during 2011.

    Year over year, the total return of my own portfolio is right around 9%. Again, fairly normal.

    Asset Allocation-

    100% equity


    McDonalds- 32.08%

    Pfizer - 13.57%

    Harley Davidson - 11.97%

    General Electric - (minus) 4.41%

    Dow Chemical - (minus) 8.87%

    Turnover ratio -


    Total Aggregate Return - 8.67%

    One must always remember to look at the market as a homogenous WHOLE. Meaning, when you measure, make sure to measure the market in terms of its ups AND downs.

  • Report this Comment On March 10, 2012, at 5:54 PM, Sunny7039 wrote:

    I can think of one way to invest when the market is "soaring."

    Make sure you have 3-5 years of living expenses in cash/cash equivalents, accounting for probable inflation in making the calculation, of course.

    There. That should do it.

  • Report this Comment On March 15, 2012, at 5:42 PM, easyavenue wrote:

    As always, Dan, you've got your finger on the pulse of the market and your 'average investor glasses' on and you hit the nail timely on the head. This is exactly the question me and every other Fool here wants the answer to. Well done.

    FWIW, how about some follow up? What valuation metrics are you using to gauge your Wish List? When the haircut hits, how much is enough? Or, how do you decide when to pull the trigger?

    What about DBC or VNQI right now?

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