I’ve heard from a variety of investors this week. Their emotions and investment strategies are running the gamut from, “Is it time to start buying stocks?!” to “Should I sell my stocks?!”
I am going to presume that you are an investor who’s invested in high-quality companies, not a day trader who’s simply seeking momentum. While it is true that investors might take precautions prior to a stock market correction—paring back positions in overvalued or overextended stocks, raising cash, and/or using stop-loss orders—an investor would not sell after their stocks have fallen. Once a good stock has fallen, it’s essentially “on sale.” It’s far more prudent to “buy low” on high-quality, fallen stocks than it is to cash them in. There are, of course, exceptions. During a market correction, you might sell shares of a great company that’s been out of favor, such as ExxonMobil (XOM), and move that money into shares of a great company that’s been exhibiting more of a thriving share price, like Apple Inc. (AAPL). But generally speaking, if you ask me, “Should I sell my shares in this company that’s delivering growing revenues and profits?”, my answer is always going to be, “No. Why would you want to do that?” If the answer is, “I want to sell this stock because the market’s falling and I’m scared,” I want to encourage you to do two things:
2 Investment Strategies for a Volatile Market
1) Hold your high-quality stock and let the market recover, which generally happens within a few months of the downturn.
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2) Right now, while you’re very uncomfortable, please write down the changes to your investment strategy that you ought to make the next time the market is near a high. If you’re wildly uncomfortable right now, you don’t really want to relive this experience, right? So examine your investment strategy, and change it a bit. The change might be small: “I will increase my cash position so that I can add to my excellent stocks the next time they’re on sale.” Or the change might be huge: “I am so done with the stock market! From now on I’m putting my money into [real estate, bonds, stock mutual funds, etc.].”
For those of you who are excitedly asking me, “Is it time to buy??!!”, my answer is, “Let’s allow the market indexes to stop falling first.” Once the indexes stop falling, they will then generally trade sideways for a bit before showing a readiness to rise. You’re not going to need to make a quick buying decision this week. Take your time, study, and think about which stocks you’d like to add to your portfolio. Then buy the ones with the more bullish price charts … not the ones that plummeted the most. Those plummeting stocks will take far longer to deliver capital gains than the stocks that didn’t fall as much.
I use these investment strategies in my Cabot Undervalued Stocks Advisor newsletter. So far, it’s worked! Despite unnerving market corrections, the average annualized return on the 100+ stocks that have been bought and then sold within my Cabot Undervalued Stocks Advisor portfolios has been a little over 15%.
To see what stocks I’m recommending now, click here.
Editor’s Note: This post was excerpted from a recent issue of Cabot Undervalued Stocks Advisor.