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3 Key Moves to Make During a Stock Market Bubble

By Maurie Backman - Feb 10, 2021 at 5:49AM

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Here's what to do when stock values are higher than they should be.

If you've been keeping tabs on the stock market, it's hard to overlook the fact that we're in a bubble. Stocks are generally overvalued right now, which means eventually, we're apt to see that bubble burst.

But that may not happen for a bit of time, so it's important to know what to do while we're still in bubble territory. Here are a few key moves worth making right now.

Serious investor at laptop looking at graph on screen

Image source: Getty Images.

1. Keep buying stocks

That's right -- you don't have to let inflated stock prices keep you from buying. What you do need to do, however, is choose the right companies -- specifically, those with the potential to hold steady once that bubble pops. Focus on companies with a clear competitive edge and businesses that continue to innovate.

Amazon (AMZN -2.78%), for example, is constantly expanding its reach. It's increasingly staking a claim to the grocery industry and recently invaded the pharmacy space. If you feel that Amazon has the potential to do well beyond the next few months, then it's worth buying its shares.

Remember, too, that if you're adopting a buy-and-hold approach to investing, higher stock prices shouldn't scare you off. As of this writing, Amazon is trading at about $3,312 a share. A year ago, it was at $2,134 a share. While its stock price could very well decline once our current bubble bursts, it also has the potential to come back up again -- and then some.

To be clear, this isn't a call to go out and buy Amazon. It's simply an example of a company with the potential to do well on a long-term basis. The key, therefore, is to find stocks whose value you expect to increase over time.

2. Take the opportunity to shift assets around

You may have stocks sitting in your portfolio that don't align with your general investing strategy or don't lend to the diversified mix you're aiming for. If that's the case, now's the time to sell those stocks -- while they're up. Of course, you may incur some capital gains taxes if you liquidate positions that have increased in value, but the alternative is waiting for the stock market bubble to burst and taking serious losses instead.

3. Stockpile some cash

Many investors live in fear of plunging stock values, but dips actually create solid opportunities to buy. Now's a good time to start stashing some cash in the bank or in your brokerage account. That way, if stock values fall, you'll have a chance to pounce. Of course, it still pays to adopt a buy-and-hold strategy for discounted stocks, but it's also good to scoop them up when they're less expensive.

Will stocks crash next week? Next month? There's no way to know. But if you stick to the above plan, you'll be doing your part to navigate today's tricky market and increase your chances of coming out ahead.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
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