Don't React Just Because the Market Is Going Up
Perhaps you're one of the many jumping back into the market or increasing your risk profile with your investments. This may be good on the whole, as investor confidence increases, but you need to make sure this is in your best interests and not just a knee-jerk reaction to the current market rally.
The Wall Street Journal reported today that sales in all sorts of investments are on the rise. Secondary stock sales have totaled $54.9 billion since the beginning of the year, the busiest period since 2000. Banks have announced more than $36 billion in stock sales. Even Microsoft is getting into the mix, raising $3.75 billion through its first ever bond sale.
On one hand, this is great news. Your appetite for risk seems to be growing, which is a good sign of your confidence in the market. Remember, the stock market is a leading indicator and tends to recover well in advance of the economy as a whole. Perhaps the worst is really behind us.
However, you can go too far as well. The Wall Street Journal article also mentions that a number of much riskier investments are seeing an uptick in interest as well. Since April, more than $13 billion in junk bonds and $3.5 billion in convertible bonds have been sold. Neither one of these investments are ideal choices for you, as I explain in my book The Only Guide to Alternative Investments You'll Ever Need.
It's also important to keep your head when making investments in equities and not get caught up in irrational exuberance. The current rally may leave you tempted to try to recoup some of your losses in a hurry. Allocating more to stocks than what you're investment plan calls for leaves you more vulnerable should another downturn occur. And chasing a hot asset class such as junk bonds is more likely to harm your portfolio than help.
You have to account for your own ability, willingness and need to take risk. This includes making the proper allocations to sound investments and not stretching for additional returns through riskier investments. You should make changes to your risk exposure when outside events merit a change, or you've discovered your risk level wasn't correct in the first place, not just because the market has rebounded.