3 Guidelines for Investing at the Tail End of the Bull

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

3 Guidelines for Investing at the Tail End of the Bull

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.

Article printed from InvestorPlace Media, http://investorplace.com/2013/06/3-guidelines-for-investing-at-the-tail-end-of-the-bull/.

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