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?
The correction/bear market in the face of tariffs was quick and painful, but the market rapidly reversed those losses, and the headline indexes are again trading above their pre-Liberation Day levels.
The debate these days largely centers around whether the market will retest prior lows (or plumb even further depths) or rapidly bounce back to all-time highs.
But that debate discounts the possibility that markets simply move sideways.
After all, tariff uncertainty is likely to stick around for quite a while as we wait for new trade deals.
And the real-world impacts of those tariffs are only just beginning to affect consumers. Even if tariffs settle at a lower level, we could still see lagging price hikes as higher-cost goods make their way through the supply chain.
So, what’s an investor to do while uncertainty remains high?
Here are three tips that can help you stay flexible in a sideways market.
[text_ad]
#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 are bullish on the short and intermediate term, but still bearish on the long term. Cash can keep you safe if the sellers get the upper hand again.
How much cash? Mike Cintolo has been holding more than 50% in cash but is actively looking for entry points, although you shouldn’t sell stocks that are still performing well to raise that much. The usual method is to follow your established 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.
#2: Keep a watch list of candidates for investment.
This one follows closely from the first suggestion. Use periods of depressed valuations to begin identifying stocks that you may want to buy when the market sends a green light.
Stocks with strong relative performance are a good place to start.
But keep in mind, 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.
#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 histories. 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.
[author_ad]
*This post has been updated from a previously published version.
