No matter whom you voted for in November, few can argue that the election result has been a bonanza for the stock market. As it continues posting a high 19,000-plus close, pundits are out in full force to opine on where we go from here. Some say a further climb is in store—others predict financial Armageddon. What should investors do? It may be wise to revisit investing 101.
Endeavoring to predict the market’s move can be a fool’s game—witness what happened after Brexit, and more recently, on November 9. What does make sense is having a long-term strategy and sticking with it. That means a diversified portfolio weighted according to your own risk profile and time horizon.
It also means dusting off some basic tenets of successful investing, starting with being smart about managing gains. As the old adage goes, ‘No one has ever gone broke taking profits.’ Many traders have a different view, but they aren’t long-term investors, and that’s an important difference. Being invested for the long haul means taking gains when a stock position has appreciated—selling half to protect the profit and letting the remainder continue to grow is one strategy—thus generating liquidity to purchase new investments or having cash on hand to take advantage of lower prices when the market turns (and it always does—but we never know precisely when).
It also means watching investment costs, something the sage of Omaha, Warren Buffett touts. With the proliferation of index funds, ETFs, and on-line trading platforms, investors can keep transaction costs to a minimum. Knowing when to quit is another one of his rules—the sell decision is often the hardest one for an investor to make.
Finding good businesses at good prices will pay off over time (the operative word), something Buffett advocates. “It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price.”
Energy and infrastructure are hot investment areas because the new administration is committed to both. And so long as people drive cars and need heat and electricity, energy companies will provide them. But energy can be fickle—and prices to a large extent are a function of global supply, which is beyond our control. Yes, OPEC has agreed to cut production to stabilize the market, but getting member countries to comply is a different story. Domestic producers, on the other hand, are taking advantage of higher oil prices to increase rig count, so may represent shorter-term investment opportunities.
Infrastructure will likely be funded by bonds, and now that interest rates have finally begun to rise, the returns are at least palatable, although no one could argue with a straight face that even a prospective 5% coupon holds a candle to the potential profits of the stock market.
But therein lies the rub—bonds stabilize a portfolio against the volatility of stocks. As the stock market moves higher, the FOMO trade—fear of missing out—picks up steam. The market always has and always will be driven by fear and greed. And sometimes both at the same time.
Long-term growth in the stock market is grounded in a healthy outlook for corporate earnings. As of January 27, 34% of companies have reported earnings for the 4Q 2016, with 65% of them beating the mean estimate. Sam Stovall, Chief Investment Strategist at CFRA, makes the case that 4Q 2016 earnings could be up by 8%.
If that trend continues, we may see even more positive momentum in the stock market. Buying companies with solid earnings performance has always been a good strategy, along with a suitable allocation to bonds as a buffer.
Rather than attempting to invest by figuring out the new administration’s investment plans, paying attention to basic investing principles may be a better path.
This article is not meant to be investment advice. Before investing be sure to consult a financial advisor.
You can read more of Merry Sheils’ articles on Merry’s Simple Finance
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