The beginning of the year is typically full of hope. We make New Year’s resolutions, and it may take a few months for our enthusiasm (and vigilance) to wane. There’s also the “January Effect,” when the stock market generally gets a performance boost thanks to tax harvesting in December and subsequent reinvestments. But even that phenomenon tends to fade.1
When it comes to investing in the stock market, we recommend a strategic approach. First, you want to consider your big picture — which includes how you ultimately want to use accumulated assets (e.g., college tuition, retirement) and when you’ll need them. You also want to make sure you don’t take on too much risk, so that requires a strategic asset allocation across a diverse group of investments. Finally, one of the basic tenets of stock investing is to buy low and sell high. We can help you with all of these tactics.
We expect 2021 to be an interesting year. Assuming wide distribution of COVID-19 vaccines and successful containment of the virus, the economy should get back on track. But as we saw in 2020, even the coronavirus didn’t have a long-term impact on the stock market.
With that said, Merrill Lynch sees a broad market uptrend in 2021. In equities, the money manager sees upside in cyclical sectors (e.g., financials, materials, industrials), U.S. small-cap value stocks and emerging markets — which are supported by the continued downtrend in the U.S. dollar.2 Bear in mind that while some of these investments pose higher risk, they also follow the tenet of buying low and selling high. The key is to find stocks that are currently selling at low prices but have the potential to rise given (1) the current economic environment, (2) market trends and (3) individual company fundamentals.
Buying low and selling high involves monitoring and due diligence, but it’s not quite the same as market timing. In fact, the best time for some to engage in a buy-sell strategy is during periodic portfolio rebalancing. Rebalancing is important because if one asset class outperforms others, your portfolio allocation may drift out of range from what’s appropriate for your risk tolerance. By selling off “winners” and reinvesting those gains, not only do you rebalance to your original strategy, but you have ready cash to “buy low” and reposition your money for further growth.3
When rebalancing, if prices seem too high to reinvest, don’t be hesitant to hold cash for a short time. Investment legend Warren Buffett maintained a highly liquid allocation over the past year, but he did so in preparation to pounce on good buying opportunities when they surfaced.4
On the other hand, there are times when buying low may not be advisable. For example, airline stocks continue to struggle despite congressional relief. Industry experts predict that revenues are unlikely to return to pre-pandemic levels for several years.5
Note that stocks tend to rise on positive news, especially if that news shows some promise of economic growth. A good example of this is when, on Jan. 19, Treasury Secretary nominee Janet Yellen advised Congress to “act big” with regard to increased coronavirus stimulus relief. Following her remarks, the Dow Jones Industrial Average rebounded from a recent losing streak and both the S&P 500 and the Nasdaq made significant gains.6
Content prepared by Kara Stefan Communications.
1 Eric Reed. The Street. Jan. 17, 2021. “January Effect: What Is It and Why Does It Occur?” https://www.thestreet.com/investing/what-is-the-january-effect. Accessed Jan. 20, 2021.
2 Merrill Lynch. January 2021. “Weak Periods May Be Buying Opportunities.” https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/Viewpoint_January_2021_Merrill.pdf. Accessed Jan. 20, 2021.
3 Sachin Nagarajan. Morningstar. Jan. 15, 2021. “A Responsible Version of Market-Timing.” https://www.morningstar.com/articles/1017362/a-responsible-version-of-market-timing. Accessed Jan. 20, 2021.
4 Theron Mohamed. Business Insider. Jan. 18, 2021. “Warren Buffett advised NFL linesman Ndamukong Suh to be ready to buy when bargains appear.” https://markets.businessinsider.com/news/stocks/warren-buffett-advises-ndamukong-suh-be-ready-buy-bargains-2021-1-1029977459. Accessed Jan. 20, 2021.
5 Alan Farley. Investopedia. Dec. 22, 2020. “Wrong Time to Buy Airline Stocks.” https://www.investopedia.com/wrong-time-to-buy-airline-stocks-5093391. Accessed Jan. 20, 2021.
6 Joseph Woelfel. The Street. Jan. 19, 2021. “Stocks End Higher as Yellen Tells Congress to ‘Act Big’ on Stimulus.” https://www.thestreet.com/markets/stock-market-dow-jones-industrial-average-banks-yellen-011921. Accessed Jan. 20, 2021.
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