The stock market has risen seven months in a row since the beginning of September 2021, and the S&P 500 has risen over 100% since the recession in early 2020. The good news is that you may have made some nice long-term capital gains during this tumultuous time, but questions still arise. Below we take a look at how you can handle the gains we’ve seen in the broad markets over the past 18 months.
1. Secure and reallocate long-term profits
This is not to say that you should sell all of your stocks, but it is a good time (compared to others) to realize some profits. If you’ve been running your stocks since the COVID-related market low in 2020, your asset allocation is likely to be heavily stock-focused. Take the current opportunity to shift some profits into lower-risk investments – this can help you maintain your asset allocation without reducing your long-term return potential.
For example, your portfolio, which is 80% stocks and 20% bonds, now looks more like a 90% / 10% portfolio. It makes sense and is risk-conscious to reduce the equity component back to 80% without your portfolio being too dominated by stocks.
2. Use the proceeds to pay off high-interest debt
If you have any high-interest debt (e.g. anything above 4% interest), there is a good case for taking some of your investment profits and paying off the debt once and for all. Getting rid of excessive debt is one of the greatest gifts you can give yourself, both financially and psychologically. We tend to immer wanting more of our investments, but when you are able to secure some nice profits and put them to good use, now is a good time to do so.
Note that this does not apply to strategic debt – a low-interest mortgage, a 0% car loan, or perhaps an interest-free loan to finance a degree. These are forms of strategic debt that don’t require immediate repayment, and you should take the lender’s offer. It will turn out that, financially, the best thing to do is not to pay off this debt right away – but you still need to be comfortable with the idea of still having debts.
3. Keep investing
Investing regularly is a surefire way to build lasting wealth. This is usually done automatically through a company pension, but you can also pay into the statutory pension. In that regard, the fact that the stock market has just hit an all-time high is no reason to stop making these deposits unless you really need the money now.
You may hear on the financial news that the market is overvalued; according to many key figures that is also true. However, we have no idea how the market will perform in the next month, year or decade. Therefore, it is best to keep investing without looking at today’s closing prices. In the long term, it is important that you have invested and stuck to your strategy.
4. Do nothing
Just because the market has risen doesn’t mean you have to act right away. If you are content with a slightly riskier portfolio and prefer to save taxes on capital gains over the long term, you can just leave things as they are. You keep your holding periods and will likely benefit from further price jumps in the future.
When something unusual – good or bad – happens in the stock market, many investors feel the need to do something. People have a tendency to trade, but when it comes to investing, you might be better off pretending your accounts aren’t there. Various studies have shown that passive investment strategies are a useful way to achieve and increase long-term wealth.
Bring your financial plan into shape
Whenever the market does better or worse over a long period of time, you may find an opportunity. Nobody can blame you for selling at an all-time high to pay off your debt, and nobody can blame you for ignoring current market prices and leaving stocks until retirement. Whatever you choose, think carefully and always have a plan before you act.
The item How to deal with long-term price gains in a hot market first appeared on The Motley Fool Deutschland.
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This article is written in English by Sam Swenson and on 09/05/2021 on Fool.com released. It has been translated so that our German readers can take part in the discussion.
Motley Fool Deutschland 2021