After a few months of trading sideways, here are three investing tips to help you navigate through all the stock market’s ups and downs.
One of Cabot’s prime investing tips for growth investors is: Don’t predict the market!
Experience has shown us that it’s virtually impossible and that any investing you do based on what you think will happen has no better odds of success than flipping a coin.
The corollary to this important rule is that you should know how to react no matter what the market does, which means investing more when markets are bullish and increasing your cash position when the bears are awake.
But what’s a growth investor to do in a sideways market?
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Investing Tip #1: Keep some cash in your growth portfolio.
This sounds pretty basic, but it’s not as obvious as you might think. Holding cash lowers your exposure to market volatility, especially in a sideways market where the next major market move is unknown. Cabot’s market timing indicators show that the long-term trend of the market is still up, but a two-and-a-half-month flat streak indicates a pretty even battle between buyers and sellers. Cash can keep you safe if the sellers get the upper hand.
How much cash? Somewhere around 30% seems reasonable, although you shouldn’t sell stocks that are still performing well to raise that much. The usual method is to follow your usual sell disciplines, then hold the proceeds as you purge the losers and laggards from your portfolio.
Cash not only insulates you from volatility, it also gives you capital to take advantage of opportunities when the market improves and starts to drive new leaders up the charts.
Investing Tip #2: Keep a watch list of candidates for investment.
This one follows closely from the first suggestion. Researching stocks while you have a significant amount of cash is like trolling online shopping sites while you have a low credit card balance. The freedom to buy what you want is energizing.
But stocks aren’t as easy to return as a pair of shoes; you want to put in the research to be sure that you’re buying the right one. And the way to do that is to know what to look for.
A great growth stock isn’t the same as a perfect value stock or a buy-and-hold dividend stock. You buy growth stocks for price appreciation, so you need to find stocks whose charts show that buyers are bidding them up.
But the biggest recommendation for putting a stock on your watch list is that the chart shows a rising price. Momentum isn’t everything, but I think it’s absolutely necessary before you add a stock to your growth stock list.
Investing Tip #3: Don’t pay too much attention to the stocks that everyone is talking about.
Stocks like Apple (AAPL) or Tesla (TSLA) are high on many investors’ lists because they have great history. A stock that has made big money in the past seems like a good candidate because it’s a proven winner. You may even have made money in such a stock yourself.
But experience has shown Cabot’s growth experts that the leaders in the previous bull market aren’t likely to be the winners in the next one. Looking farther afield for younger, stronger stocks can make a big difference.
“ … it has been my observation—and, I must ruefully confess, my personal experience—that when one is young, it is almost impossible to conceive of ever reaching middle age. The average person will not—he is constitutionally unable to—begin practical planning for retirement until he becomes consciously aware of the inevitability of retirement. At what age or stage that will happen depends on the individual. In any event, it is never too early to start but it is never too late, either, for a few years, or even months, of preparation are better than no preparation at all.”
—J. Paul Getty in The Golden Age.
“The best time to plant a tree was 20 years ago. The second best time is now.”
Tim’s comment: J. Paul Getty used a lot of words to say what the Chinese said—memorably—in just 17. But the message is the same, and the sooner it can be communicated to—and heard by—younger generations, the better, especially for those who heed the wisdom. In fact, the more this lesson is ignored, the greater the appetite will be for a one-size-doesn’t-fit-all government-sponsored solution—and that way lies mediocrity.
What’s your preferred cash percentage to weather market corrections or bear markets?
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*This post has been updated from a previously published version.