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? That’s what we essentially have now. After a couple very down months, stocks have rallied sharply in the past 10 days, to the point where the S&P 500 has traded almost exactly sideways since late January. What to do as the market yo-yos back and forth? Here are three tips:
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-month down to flat streak indicates a pretty even battle between buyers and sellers. Cash can keep you safe if the sellers get the upper hand again.
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.
What’s your preferred cash percentage to weather market corrections or bear markets?
*This post has been updated from a previously published version.