You know what to do when the stock market crashes: Stay calm. No panic selling. Buy even more if you can. But what about when the stock market surges?
That's what's happened so far this month, following a rocky September and October. The S&P 500 index soared to a record high Monday following Pfizer's (PFE 2.02%) announcement that the coronavirus vaccine candidate it's developed with German partner BioNTech (BNTX 1.74%) appears to be more than 90% effective. The news prompted Goldman Sachs (GS 1.67%) to up its year-end S&P 500 target by 4%. Goldman analysts predict that by the end of 2021, stocks will surge by 21% from Tuesday's close.
What should you do if the surge continues? Here are five ways to approach investing in stocks if the market soars again tomorrow.
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1. Curb your enthusiasm
We've known from early on that a coronavirus vaccine is coming at some point. Monday's news spurred optimism that we'll get one sooner than many predicted and that a return to normalcy won't be far behind. But unless you truly believed that humanity was doomed thanks to the pandemic -- and Pfizer's announcement changed your mind -- this doesn't alter your long-term outlook much.
Whether the first vaccines are available by the end of 2020 versus three months later probably won't have a huge effect on the stock market five or 10 years from now. Simply getting a vaccine that's effective and widely available is what matters most, not the exact timeline. Unless Pfizer's announcement completely transformed your expectations for the next decade or more, there's no reason to change your investment strategy now. Ditto for any time that a piece of big news causes stocks to rally or crash.
2. Ditch your losers while they're up
You know the cliche about a rising tide lifting all boats. So if you've been suffering from a case of buyer's regret, now may be a prime time to sell any stocks you're bearish on. Same goes for any that you feel are too risky for your tastes. Just don't try to time the market by holding on until you can get top dollar. Sell while you're ahead (or at least a little less in the red), knowing that even if the stock market surges tomorrow, it could plummet the day after that.
3. Rebalance, if you've been putting it off
Too many investors don't think about rebalancing until the market has already crashed. When you shift to more conservative assets after the market tanks, you're too late; you'll wind up selling low. If you're trying to reduce your portfolio's risk, the best time to rebalance is when stocks are high. But tread cautiously here. Interest rates are ridiculously low, which means bond yields are also low. Reducing your stock exposure by investing in bonds could result in earnings so low, they can't keep up with inflation.
4. Buy calls if you're bullish
If you're cautiously bullish about certain stocks, now may be a good time to buy call options, which give you the right, but not the obligation, to buy a stock at a certain price within a specified time frame. (Buying puts, the other type of option, gives you the right to sell.) While some people engage in complex options-trading strategies, that shouldn't be your goal. The reason to buy calls here is to lock in a lower price for a stock if you think the price will keep soaring, but you're not sure enough that you're actually ready to buy the stock.
5. Invest like it was an ordinary day
The best thing for most people to do if stocks surge tomorrow is to stick with today's plan. Keep dollar-cost averaging as usual. Even if you wind up overpaying for your investments sometimes, you'll also buy on the dip at other times.
But if you have a lump sum that's earning next to nothing in a savings account, now is as good a time as any to invest it. Sure, you'll pay more than you would if you could perfectly predict the bottom. But the best results usually come from maximizing the time your money has to compound in the market, rather than timing your investment to score a bargain.
