4 Investing Strategies to Navigate the Stock Market in 2021

If you’re nervous about the current state of the stock market, you’re not alone. After a sustained and rapid rise in stock prices, valuations look as though they may be a bit stretched. Valuations like these have often come before a market crash , which has a lot of investors worried. The big challenge, however, is that while it’s easy to predict that a crash will happen, knowing when that crash will take place is a whole different story.

The best any of us can really do is manage our portfolio around the reality that the market doesn’t always go up and that sometimes, it falls fast. You can’t successfully invest if you’re paralyzed by fear, but you can get yourself better prepared while continuing to put money toward your longer-term future. With that in mind, here are four investing strategies to help you navigate the stock market in 2021.

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No. 1: Estimate the value of what you own

A technique like the discounted cash flow model can help you get a handle on what your stocks are really worth. That model simplifies things to focus on a company’s ability to generate cash over time. Based on a reasonable estimate of the cash it will generate and the rate of return you need to take on the risk of investing in its stock, it will help you understand what a fair value is for its shares.

It’s not perfect, as the numbers it generates are based on assumptions about the future. What it can do, though, is help you find a reasonable estimate of that value and recognize the key drivers behind it. That gives you something to compare against the company’s actual progress over time and help inform your decisions on what to do with your investment capital.

No. 2: Keep an eye on your companies’ balance sheets

In good times, it’s easy to overlook a balance sheet. When times get tough, though, a solid balance sheet can be the difference maker when it comes to a company’s ability to stay afloat. This is because its balance sheet represents the company’s assets and liabilities — and most importantly, its ability to access cash if the lending market gets spooked.

Key measures to look for are the business’ current ratio and its debt-to-equity ratio. Its current ratio measures its short-term assets (think cash and things that are usually easily converted into cash) compared to its short-term liabilities like its debt coming due within a year. The higher that number, the less likely the business will be to face a near-term cash crunch.

A company’s debt-to-equity ratio looks at the totality of what it owns compared to what it owes. In this case, the lower the number (as long as it’s zero or above), the stronger the balance sheet is. This number can help investors determine how much longer-term flexibility a company has if the debt market were to remain unfavorable for a long time. In addition, the healthier this ratio, the more likely that the company will be able to get new financing even in a…