Stocks seem to be defying gravity these days.
The S&P 500 is back at record highs after posting a six-day winning streak that ended on Monday. The market hasn’t taken much of a step back recently either, which has caused anxiety for investors. The biggest dip in the past few months was January’s 3.6% swoon, and it disappeared in two days.
Everybody’s heard the old “buy low, sell high” investing advice. But that saying doesn’t help when the market relentlessly moves higher on reopening expectations, stimulus hopes, support from the Federal Reserve and speculation. While stocks may look stretched and feel ripe for a selloff, it is best to prepare your portfolio for the potential of both more market upside and downside. Markets rarely move in a straight line, after all.
So what can you do when you’re patiently waiting for a pullback? We have some ideas: Go with the flow, look for the opportunities and stash some cash.
Go with the flow.
Selloffs can happen occasionally, even in healthy markets when earnings and the economy are growing. In fact, 10% drops in the S&P 500 have occurred about every two years since 1950. And there have been six in the past 11 years.
Don’t try to time the market though. Stocks can go years without a significant drop, even if fundamentals break down and valuations don’t make sense. From 1990 to 1997, the S&P 500 gained more than 200% without falling more than 10% at any point. If you wait until the environment feels right, you may miss out on some big gains.
Don’t be afraid of buying at record highs either. Many records aren’t market tops; they’re just steppingstones to higher prices. The S&P 500 has reached over 1,100 record highs since 1950. If you’ve bought in at any of those records, there’s been a 99% chance the index has reached another record high in the next 12 months. And the returns after buying at record highs have been respectable.
So while double digit drops each year are common, it’s also possible for the market to keep chugging higher. Sometimes it’s easier to stay calm and ride the market waves.
Another option if you’re feeling unsure is to try dollar-cost averaging. It’s a simple strategy with a complicated name: You simply invest a set amount of money on a regular basis, no matter where the market is trading. With this strategy, you’ll tend to buy more shares when the market is low and fewer shares when the market is high, and you don’t have to worry about the timing. It can also help you separate your emotions from your investing.
Look for opportunities.
There’s always opportunity in the stock market if you’re willing to look for it. Today, major indexes may be near record highs, but we think there’s still value to be found there.
Consumer staples companies, which make household items like toothpaste and toilet paper, could be one of those overlooked groups. They’re the only S&P 500 sector that’s fallen this year, yet their fourth-quarter results have exceeded Wall Street’s estimates with 79% of companies beating earnings estimates. Consumer staples tend to perform better when inflation begins to rise because they can easily pass on higher costs to customers. Plus, this group pays an outsized dividend.
You could also strengthen your portfolio by grabbing a barbell. And we’re not talking about the gym.
A barbell strategy in investing is when you load up on both aggressive and conservative assets, like two weights on a barbell. While you may give up some returns when one group outperforms the other, the balance of risk can help shield your portfolio from market swings.
Take last September’s selloff, for example. The S&P 500 fell 9.6% between September 2 and September 23, yet the weakness hit certain sectors harder than others. Tech fell 12.8%, and certain stocks, including Apple and Tesla, fell more than 20%. On the other hand, sectors such as utilities and industrials only fell 5%. Dividend aristocrats, stocks with a long history of paying dividends, only declined 1.6%.
Other assets can be part of your barbell too. Bonds and gold tend to perform better in crises, and they could soften the blow if stocks fall.
Stash some cash.
Some investors view drops as a chance to buy stocks on sale. As legendary investor Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.”
If you’re feeling opportunistic, make sure you have cash on hand in case you want to take advantage of a market drop. Cash may get a bad rap, but it’s an important part of any portfolio because it gives you the chance to take action when opportunity arises.
Lately, you haven’t had to wait long for a recovery after a market decline. In the past decade, the S&P 500’s five drops between 10 and 20% have recovered in an average of five months.
Stick to your plan.
A stock selloff isn’t always something to fear. Sometimes the market needs to take a step back, even when the fundamentals haven’t changed.
But you can’t control how a market moves. You can only control how you react to it. No matter what stocks do next, make sure you have a plan for your money and stick to it. Preparation is what keeps you calm and focused in the middle of market mayhem, and it could ultimately help you reach your investing goals.
Callie Cox, Senior Investment Strategist, contributed to this article.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo-advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.
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The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.