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Do This Before You Buy Yesterday's Rally

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Yesterday's stock market surge was a welcome sight for investors who were brave enough to put their money to work in stocks despite fears about the fiscal cliff. For everyone else, though, including those who've been too worried about the markets to get back in ever since the financial crisis four years ago, the megamove in stocks poses yet another dilemma: Should you buy now even with the S&P 500 (SNPINDEX: ^GSPC  ) approaching a five-year high?

Investment advisors spend a lot of time telling their clients how to deal with plunging markets and the panic that they can make you feel. But an equally important skill that you must learn as an investor is how to deal with markets that go up as fast as market crashes move stocks down.

Open your eyes
Ever since the election, investors have focused almost exclusively on the fiscal cliff. Every punch and counterpunch from both sides of the aisle seemed to move markets, even though the amount of visible progress in actually dealing with the problem was glacial at best.

Moreover, companies responded to investors' fears by focusing equally hard on the tax issues raised by the fiscal cliff. Costco (NASDAQ: COST  ) , Las Vegas Sands (NYSE: LVS  ) , and Sturm, Ruger (NYSE: RGR  ) were just a few of the dozens of companies that paid out special dividends in order to help shareholders lock in 15% maximum tax rates on their payouts, rather than potentially paying up to 43.4% if favorable dividend-tax provisions had been allowed to expire in full. Even with the compromise, dividend investors avoided having to pay as much as 23.8% on the dividends they received. Moreover, many other companies, including Wal-Mart (NYSE: WMT  ) and Coach (NYSE: COH  ) , accelerated 2013 dividends into 2012 to take advantage of the same trend.

Now that the immediate impact of the fiscal cliff has been dealt with, though, it's essential to broaden your horizons and consider everything that's affecting investors and their money right now:

  • Although the tax rates set by the Congressional compromise address a major concern among shareholders, the measure still doesn't address the fundamental imbalance between spending and revenue. Increasingly, investors expect Fitch Ratings or Moody's to follow the lead of the S&P in downgrading U.S. Treasury debt, which could spur higher rates and a return to slow growth or even recession.
  • European stock markets have soared along with U.S. stocks, but the financial crisis on the Continent is far from having run its course. Unless and until a stronger global economy starts to perk up, Europe will be especially vulnerable to economic shocks that could create new debt problems for the weaker countries in the European Union.
  • Chinese stocks have rebounded about 15% from lows just over a month ago, with bulls pointing to measures from the Chinese government to stimulate growth. Yet fears ranging from company-specific fraud allegations to broader questions about the systemic risk in China's economy overall continue to plague investors.

All of these pros and cons may leave you more confused than ever. That's why it's so important not just to dump your money into the market but rather to have a solid and well-thought-out plan of attack for your investing.

Don't panic
It's not uncommon for stocks to rise on the first day of the year, but you shouldn't be afraid that you'll never get a better buying opportunity. Last year, stocks soared in the first quarter, only to give up all their gains in May.

Rather than rushing into your next investment, take some time and figure out a more sustainable long-term strategy. If you have a substantial amount of savings, you may decide to invest a bit of it every month for the next several months to hedge your bets if the market drops. Not only will that lead you to make smarter investment choices, it will also take the pressure off and get you into a more objective, less emotional mood about your investing.

Yesterday's rally may have inspired your inner greed, but don't give in. Take the time you need to invest smarter, and you'll be much happier with the results.

Looking at individual stocks can be a smarter move than buying the entire market. For instance, with its special dividend done, Las Vegas Sands now needs to convert on its big bet on international gaming. With economic conditions sluggish, though, is Las Vegas Sands a smart buy right now, or should you wait to see if it can deliver good financial results first? Learn about all its opportunities and the risks they pose in our brand new premium report on Las Vegas Sands. We're providing a full year of analyst updates to go with it, so make sure to claim your copy today by clicking here.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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12/19/2014 4:04 PM
COH $36.49 Up +0.06 +0.16%
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RGR $34.85 Down -0.15 -0.43%
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