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3 Guidelines for Investing at the Tail End of the Bull

There's no need to chase prices if you have a little patience


Over so soon? It seems odd, after the huge stock rally we had from January to May, that the market could digest all its gains with just a 10-day, 3.6% pullback for the S&P 500 index (closing basis).

But stranger things have happened.

In 1995, the S&P never dipped more than 2.5% — and it took until December for share prices to weaken even that much.

Of course, 1995 was the beginning of a five-year market surge. Here in 2013, stocks have already been climbing more than four years, so we’re likely a good deal closer (in both time and price) to a major top than a major bottom.

So how do we make money in this kind of environment without taking portfolio-busting risks? Here are three guidelines to follow:

1. Go light with your stock exposure.

I’ll repeat, as I’ve said in many newsletters before, that I do not advise you to sell all your stocks. All-in or all-out timers seldom succeed over the long run. If you own high-quality stocks or mutual funds that you bought years ago at substantially lower prices, you probably shouldn’t disturb them — especially in a taxable account.

As a broad goal, though, I recommend that you dial down your total stock weighting in your portfolio to about 10%-15% below what you would consider normal. (In the model portfolio for my Profitable Investing newsletter, we’re at 50% stocks, vs. a norm of 60%-65%.) Wear thicker padding than usual so you can keep playing what’s likely to be a rough-and-tumble game.

2. Stretch out your buying schedule.

Many investors who sat too long in cash during the previous stages of the market’s advance now feel enormous self-imposed emotional pressure to hop aboard the speeding train. Check that urge. Even bullet trains make occasional stops — and the next halt might cause quite a lurch. Spread out your purchases over a period of three to six months. That way, you’ll be far less likely to end up with a pile of stock acquired at top dollar.

3. Take advantage of sudden price drops.

I’m not referring here to a broad market pullback, although that, too, would certainly create a buying opportunity. What I mean is that you should watch for situations where an individual stock (or a whole industry group) gets knocked down further than the news background would justify.

A classic case occurred in November 2012. Panic over the looming expiration of the Bush-era tax rates triggered a sharp selloff in high-dividend stocks, utility shares in particular. It was an overreaction, and we at Profitable Investing used it to scoop up a bunch of utilities at bargain prices. Many have since climbed 20% or more.

More recently, in April, we got a chance to buy Apple (AAPL) and IBM (IBM) at significant price concessions amid the hysteria surrounding the two companies’ quarterly earnings reports. Count on it: In coming weeks and months, you’ll find many more of these “single items” on sale.

I would buy industrial stock Fluor (FLR), a leading global player in engineering and construction, on a dip to $62 or less. It’s more of a cyclical stock (sensitive to the ups and downs of the economy) than stocks I typically recommend, but the defensive sectors of the market—such as foods and beverages, healthcare and utilities — have appreciated so dramatically in the first half of 2013 that certain cyclicals now appear to offer better value. I don’t care about labels. I care about safety and upside potential. FLR is where it’s at.

Fluor owns a rock-solid balance sheet (low debt, lots of cash). Furthermore, it’s now quoted at discounts to average P/E of the past five years. At the buy level indicated, I project that FLR will rack up a total return of at least 20% in the next 12 months — my preferred threshold for lower-yielding, “growthier” stocks, which tend to be more volatile than the headline market indices.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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