Learn these rules to profit in the market
It’s no longer the stock market — it’s the stuck market. Or at least that’s what it seemed like for much of last summer and fall as the Dow Jones industrial average fluctuated between roughly 10,500 and 11,600.
What’s upsetting is that all that motion didn’t earn you much. The major market indexes and your investment balances ended up flat after weeks or months.
How do you cope with a trading-range market? It not enough to put your money into a broad stock-market index fund and forget about it. Here are four tips for earning a decent return even if stocks stay in a funk for years.
- Buy on weakness, sell into strength. Once stocks drop 15 percent or more, it’s almost always too late to sell. Instead, buy some stocks or stock funds if you happen to have the cash.
Similarly, after stocks roar for a month, as they did in October, it’s too late to go on a buying binge. But it’s not too late to cash in some profits to arm yourself for the next decline. Don’t confuse this with market timing. Consider this a hedging exercise designed to let the market’s rhythms work for you, not against you.
- Focus on dividends. Dividends are a bonus in up markets and provide comfort during slides. Over time, dividends have provided about 44 percent of the U.S. stock market’s annualized total return of 10 percent. And they are sure to remain an important component of returns if appreciation is hard to come by in coming years, as we expect.
And although there are always exceptions (see bank stocks in 2008), dividend-paying stocks tend to hold up better than non-payers in down markets.
- Set low-ball limit orders. If your strategy includes building stakes in companies that regularly raise dividends, you’d be wise to add more shares as time passes.
Here’s a tip: Even if a stock has been weak of late, enter a limit order to buy shares at 3 percent off its current price. There’s a good chance you’ll get your price as soon as traders create some drama because of the euro, the budget deficit or whatever floats their boats on a given day. Every percentage point or two you save on your buys adds to your return later.
- Avoid high-octane, all-or-nothing mutual funds. Sometimes, aggressive managers make brilliant investments and deliver spectacular results. The problem is that most investors buy and sell these funds at just the wrong time: They buy after spectacular performance and they sell after a fund craters. That’s no recipe for success.
Jeffrey R. Kosnett is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to email@example.com. And for more on this and similar money topics, visit www.Kiplinger.com.)
© 2012 Kiplinger’s Personal Finance